Y5 T1 Fairman Acc. Chapter 7.ppt

1、Accounting for Management Decisions, 2012Chapter 7,Statement of Cash Flows,Prepared by Anne Abraham, University of Western Sydney,2,INTRODUCTION TO THE STATEMENT OF CASH FLOWS,What is a statement of cash flows? Reports information regarding cash inflows and cash outflows for a particular period of t

2、ime Prepared on a cash basis, not an accrual basis Concerned with the timing of cash receipts and payments, not the timing of the underlying transactions,EXAMPLE PROBLEM #40 - 7,True or False. The net profit of a company is always equal to the change in cash during the same period. Explain.,Prepared

3、 by Anne Abraham, University of Western Sydney,4,INTRODUCTION TO THE STATEMENT OF CASH FLOWS continued,Why is a statement of cash flow needed? To provide information about: cash receipts cash payments net change in cash resulting from operating, investing and financing activities To ensure that an e

4、ntity has enough cash on hand to meet its financial commitments in a timely fashion,EXAMPLE PROBLEM #41 - 7,True or False. Having too much cash on the balance sheet or having too little cash are both signs of poor cash management by the company. Explain.,EXAMPLE PROBLEM #42 - 7,The following is a li

5、st of business/accounting events. In each case, state the effect (increase, decrease, or no change) on both cash and profit: a) repayment of a loan b) making a sale on credit (higher than cost) c) buying a non-current asset for cash d) depreciating a non-current asset e) receiving cash from a trade

6、debtor f) buying some inventory for cash g) making a share issue for cash h) selling inventory for cash (higher than cost),7,EXAMPLE STATEMENT OF CASH FLOWS,OPERATING, INVESTING, AND FINANCING ACTIVITIES,The three components of the cash flow statement are: Operating activities - represents net inflo

7、ws from operations, only cash received and paid, not expenses and revenue are featured Investing activities - concerned with cash payments to acquire additional non-current assets, and cash receipts for disposal of such assets e.g. plant and machinery, shares etc Financing activities - deals with fi

8、nancing the business excluding short-term credit e.g. debt and equity sources, share issues, repayment of debt etc,Note: Different books have different classifications for interest and dividends; however, we will follow the examples in your book which classify activities that affect the income state

9、ment as “operating” even if they are not the companys core income sources.,EXAMPLE PROBLEM #43 - 7,For each item listed, identify the activity and whether it is an inflow or an outflow. Then, state whether it is an operating, investing, or financing activity. a) dividends received b) taxation paid c

10、) payments to suppliers and employees d) interest paid e) purchase of property, plant, and equipment f) dividends paid g) proceeds on sale of investments h) interest received i) long-term borrowing,PREPARATION OF THE CASH FLOW STATEMENT AN OVERVIEW,Direct Method: Decide on the which type of activity

11、 is occurring and subtract outflows from inflows. Indirect Method: Reconstructing the income statement by tracking the changes in the balance sheet for the period and eliminating accrual transactions so that only cash transactions remain, forming the basis for preparing the cash flow statement,Note:

12、 The only difference between the indirect method and the direct method is in the operating activities section. However, the final answer is the same.,DIRECT AND INDIRECT METHODS,INDIRECT METHOD SUMMARY,Add depreciation Add decreases in assets Deduct increases in assets Add increases in liabilities D

13、educt decreases in liabilities,EXAMPLE PROBLEM #44 - 7,Consider the following balance sheet balances for the year (all $): Ending Beginning Cash 65,000 70,000 A/P 51,000 58,000 Inv. 145,000150,000 PPR 7,500 8,000 A/R 100,000 90,000 Operating profit after tax for the year was 55,000; depreciation was

14、 22,000; cash flows from investing activities totaled (370,500) and cash flow from financing activities totaled 300,500. What was the amount of cash flows from operating activities during the year?,IMPORTANT!,The following slides discuss how we arrive at the different numbers found on the cash flow

15、statement. It can be complicated, so please read the relevant pages in your book if necessary.,CASH RECEIPTS FROM CUSTOMERS,Deducing cash flows from operating activities 1. Calculate cash receipts from customers:,*This is the amount NOT received because its still in accounts receivable.,PAYMENTS TO

16、CREDITORS FOR INVENTORY PURCHASES,Deducing cash flows from operating activities 2. Calculate payments to creditors for inventory purchases:,*To calculate purchases for the period, the formula is: closing inventory opening inventory + cost of goods sold,This is the amount NOT received because its sti

17、ll in accounts receivable.,INTEREST PAID,Deducing cash flows from operating activities 3. Calculate interest paid relating to interest payable:,*This example is simple due to the absence of a payable (in this case, interest payable).,INCOME TAXES PAID,Deducing cash flows from operating activities 4.

18、 Calculate income taxes paid relating to income taxes payable:,*This should make sense to you since the income tax paid this year is last years income tax expense.,NET CASH USED IN INVESTING ACTIVITIES,Deducing cash flows from investing activities: 1. Complete the cash flows from investing section:,

19、NET CASH PROVIDED BY INVESTING ACTIVITIES,Deducing cash flows from financing activities: 1. Complete the cash flows from financing activities section:,*The dividends paid calculation is similar to the income taxes paid calculation. 15 + 20 20 = 15, which is the dividend liability from last year.,CASH FLOW STATEMENT FROM PREVIOUS EXAMPLES,*This number MUST equal ending cash minus beginning cash on the balance sheet!,EXA