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Measuring & Reporting Cash Flows (Explain why cash and cash flows are…
Measuring & Reporting Cash Flows
Explain why cash and cash flows are important to
the reporting entity
‘life blood’ of a business
the medium by which assets are acquired, expenses are met, debts are paid and owners receive returns
An entity needs to ensure it has enough cash on hand to meet its financial commitments in a timely manner
E.g. employees don’t like waiting to be paid their wages
E.g. Penalties for insolvent trading, ie knowing cash is not
available to pay bills when they are due
Analysts and others watch the cash position carefully in trying to assess the ability of the business to survive and to take advantage of commercial opportunities as they arise
Entities can be quite profitable yet still fail due to poor cash management
Explain the nature, purpose and layout of the
statement of cash flows
Reports information regarding cash inflows and cash outflows for a particular period of time
Prepared on a
cash basis
, not an accrual basis
The statement of cash flows helps ascertain the cash generated through the operating cycle
What do Statements of Cash Flows generally tell us
Tracks the sources and uses of cash over time, which is indicative of trends and useful for predicting future opportunities and patterns of cash flow
Provides an insight to management of working capital
Working capital (Topic 11) is the excess of current assets over current liabilities, CA‐CL.
Is a good indicator of debt management practices
What do Statements of Cash Flows
generally tell us
Identifies non‐operational cash flows
layout
Operating activities
Affect income statement revenue and expenses; Current assets and liabilities (“working capital”) in the balance sheet
Cash from operating activities shows ability to:
generate cash from core business activities
meet short term obligations
continue as a going concern
expand
Operating activities – day‐to‐day income producing activities
Inflows
cash received from customers
receipt of interest (financial institutions)
dividend receipts
Outflows
payment of salaries and wages
payment of tax
payments to suppliers
payment of interest
Investing activities
Affect non-current assets in the balance sheet
including
non‐current assets (including property, plant and
equipment, and other productive assets)
investments (such as securities) not falling within the
definition of cash
Financing activities
Affect non-current liabilities and
equity in the balance sheet
Consist of:
Activities that change the size and/or composition of the
financial structure of the entity (including equity)
Borrowings not falling within definition of cash
Usually associated with changes in non‐current liabilities and equity
Prepare a simple statement of cash flows
Analysis may provide early warning signals
Cash received is less than cash paid … Operating outflow.
Cash receipts from customers are less than cash payments to suppliers and employees
Net cash from operating activities is lower than profit after tax.
Proceeds of share capital are used to finance operating activities.
Inflows from investing activities suggestive of difficulties
Proceeds from borrowing are continually much greater than the repayment of borrowings.
Etc etc
Explain a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision‐making
Identify some of the potential complexities that arise with statements of cash flows
Deducing ‘Cash Flows from Investing Activities’
Complications in deducing amounts spent on non‐current assets, and proceeds from sale of non‐current assets
• Cash from disposals can be deduced from gains or losses on disposal (Gain = Selling price – Carrying value)
• Cash for acquisitions can be deduced from balance sheet:
Deducing ‘Cash Flows from Financing Activities’
Complications in finding cash flows from owners when
• Bonus shares were issued
• Shares exchanged for non‐cash assets or to extinguish debt
• Shares were repurchased
Explain what the statement tells us,
Some methods to improve cash flow
• Invest surplus cash wisely
• Cash planning (budgeting)
• Develop good supplier relationships
• Inventory control
• Progress payments/buyer terms
• Use trade credit/alternative credit (eg credit cards)
• Credit and debt collection policies