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CHAPTER 9

CASHFLOW STATEMENTS

PURPOSE OF THE STATEMENT OF CASH FLOWS

Statements of cash flows


reports the changes in cash over a period of time
and explains these changes:
complements accrual based P/L account by showing
performance on a cash basis
summarizes operating, investing and financing
activities
statement of cash flows includes non operating
sources and uses of cash

Previous to statement of cash flows (FRS1),


accountants prepared the statement of sources and
uses of funds, funds statement and statement of
changes in financial position (SSAP).

Funds has broader definition than cash


Statement usually listed sources of funds, followed by
uses
Statement of cash flows mandated two important
changes
a) prepared for cash only
b) divided into: operating, investing and financing
(both sources and uses of cash listed within)

THE DEFINITION OF CASH:


CASH AND CASH EQUIVALENTS

Certain items are recognized as being equivalent to cash

Must be readily convertible to a known amount of cash, within a


maturity to the investor of 3 months or less

Examples include commercial paper, money market funds,


treasury bills

For purposes of presentation on the balance sheet and statement of


cash flows, their purchase is viewed as a transfer within cash, not
as a cash outflow

Cash comes from

Cash In

Funds Out

Cash goes to

Profits

Losses

Sales of Fixed Assets

Purchase Fixed Asset

Decrease in Stock

Increase in Stock

Decrease in Debtors

Increase in Debtors

Capital Introduced

Drawings/Dividends

Loans Received

Loan Repaid

Increase in Creditors

Decrease in Creditors

Cash as per end of previous year B/S


+ Changes of cash flows during
intervening period
= Cash as per end of following period
B/S

CLASSIFICATION OF CASH FLOWS


3 types of activities appear on statement of cash flows:
1.

OPERATING ACTIVITIES

2.

INVESTING ACTIVITIES

3.

FINANCING ACTIVITIES

CLASSIFICATION OF CASH FLOWS


1)

Operating activities

like a P/L account prepared on a cash basis

cash effects of items that enter into the determination of net profit

usually relate to an increase or decrease in a current asset or liability

returns on investments and servicing of finance interest paid and


received

taxation tax cash flows on revenue and capital profits.

are generally the cash effects of transactions


and other events relating to operating and trading activities, include
acquiring and selling products and services, reported on a cash basis.

2) Investing activities:
involve acquiring and disposing of assets,
loans to and from other entities

cash paid for plant and equipment referred


to as capital expenditures.

3) Financing activities:
are the issue of share and various forms of debt
(debentures), and their repurchase or repayment, the
capital element of finance lease, rental payments,
commission expenses on shares, debentures, loans,
bonds or other financing

Usually relate to long term liabilities or shareholders


equity

ADJUSTMENTS NEEDED TO NET PROFIT


depreciation,
bad
debts
provisions
and
profits/losses on sales of assets are non-cash
items needed adjustment
2 METHODS OF REPORTING
FROM OPERATING ACTIVITIES
Gross (Direct method) or
Net (Indirect method)

CASHFLOW

Direct method

Reports major sources of cash receipts and cash payments

It is prepared by analyzing the cash and bank accounts of the


company.

Examine each item on the P/L account and decide how much
cash it either generated or used

A net increase in trade receivables accounts must be deducted from


sales to calculate how much cash sales generated

Cash actually expended is arrived at by deducting from expenses any


increase in related liability accounts.

Direct method
Example :
RM
Cash sales

xxx

Cash received from trade receivables

xxx

Less: Cash purchases

xxx

Cash paid to trade payables

xxx

Cash expenses

xxx

Net cash flow from operating activities

RM
xxx

(xxx)
xxx

Indirect method

adjust net profit for non-cash items (revenue items


that did not provide cash or expense items that did not
use cash) to find the net cash flow from operating
activities

Accruals and deferrals are removed

The first line is always the net profit of the period

Deduct an increase in debtor accounts, which indicates


that sales were made but not collected

Add back an increase in creditor accounts because


purchases were made but not paid yet

X Limited
Cash Flow Statement for the year ended 31 December 20X9
RM
Cash flow from operating activities
Operating profit before taxation
Adjustments for:
Depreciation
(Profit)/Loss on sale of non-current assets
Increase/(Reduction) in the provision of doubtful debt
Operating cash flows before movements in working capital
(Increase)/Decrease in inventories
(Increase)/Decrease in trade receivables
Increase/(Decrease) in creditors
Cash generated by operations
Tax paid
Interest paid

xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
(xxx)
(xxx)
(xxx)
xxx

Net cash from operating activities


Cash flows from investing activities
Dividends from joint ventures
Dividends from associates
Interest received
Payments to acquire non-current assets
Receipts from sales of non-current assets
Sale of business
Net cash from investing activities
Cash flow from financing activities
Ordinary dividends paid
Preference dividends paid
Issue of ordinary share capital
Repurchase of debenture loan
Net cash from financing activities
Net Increase/(Decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

RM

xxx
xxx
xxx
(xxx)
xxx
xxx
xxx

(xxx)
(xxx)
xxx
(xxx)
xxx
xxx
xxx
xxx

X Limited
Cash Flow Statement for the year ended 31 December 20X9
RM
RM
Cash flow from operating activities
Operating profit before taxation
xxx
Adjustments for:
Depreciation
xxx
(Profit)/Loss on sale of non-current assets
xxx
Increase/(Reduction) in the provision of doubtful
debt
xxx
Operating cash flows before movements in working
capital
xxx
(Increase)/Decrease in inventories
xxx
(Increase)/Decrease in trade receivables
xxx
Increase/(Decrease) in creditors
xxx
xxx
Cash generated by operations
xxx
Tax paid
(xxx)
Interest paid
(xxx)
(xxx)
Net cash from operating activities
xxx

X Limited
Cash Flow Statement for the year ended 31 December 20X9
RM
RM
Cash flows from investing activities
Dividends from joint ventures
Dividends from associates
Interest received
Payments to acquire non-current assets
Receipts from sales of non-current assets
Sale of business
Net cash from investing activities

xxx
xxx
xxx
(xxx)
xxx
xxx
xxx

X Limited
Cash Flow Statement for the year ended 31 December 20X9
RM
RM
Cash flow from financing activities
Ordinary dividends paid
Preference dividends paid
Issue of ordinary share capital
Repurchase of debenture loan
Net cash from financing activities
Net Increase/(Decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

(xxx)
(xxx)
xxx
(xxx)
xxx
xxx
xxx
xxx