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Chapter 7 - Statement of Cash Flows (Parts of a statement of cash flow…
Chapter 7 - Statement of Cash Flows
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Statement that reports an entities cash inflows and outflows
Inflows
:moneybag:
Flow of cash from
purchases
account receivable
investments
Outflows
:money_with_wings:
Flow of cash from payments in
Purchase and payment of Inventory
Payment for labour
Loan and long term debt
General expenses
Leases
Owners Drawings. dividends
Can be
Positive
Neutral
Negative
Working capital
Working Capital = CA - CL
Difference between current assets and current liabilities
Working Capital cycle
operating cash cycle: time between
payment of inventory, wages etc and the collection of debts
Minimising time can:
entity will save on funding costs
funding costs ie: interest
Prudent Companies tightly manage:
working capital requirements
their operating cycle
Cash vs Accrual accounting
Accrual:
When the transaction takes place
text
Cash:
When payment for that transaction happens
Cash Flows
Cash movements from parties outside the entity
Cash inflows
cash movements into the entity
Cash outflows
Cash movements out of the entity
Cash flow statement shows
Entities ability to
generate
cash
Meet it's
financial commitments
as they fall due
servicing borrowings
payment of dividends
Fund
changes
in the scope and or nature of it's changes
getting
external finance
Cash at end of period should match cash in
Balance sheet
Items in cash flows from investing should be compared to
non-current
assets in
Balance Sheet
Cash
Cash and cash equivalents
Cash on hand
Notes, coins and deposits accessible through a financial institution
Cash Equivalents
Highly liquid investments and short-term borrowings
Parts of a statement of cash flow
3. Financial activities
Activities which change the size and composition of the financial structure of the entity.
includes equity and borrowings
not falling within the definition of cash
2. Investing activities
Relate to acquisition of or disposal of non-current assets
purchase or sale of property, plant equipment
other productivity assets not defined as cash
release or buy-back of shares
1. Operating Activities
Provision of goods or services
Not related to investing or other financial activities
Reconciliation of net cash in/outflow
Adjustments in non-cash items from income statement
(+) depreciation/amortisation/loss on sale of asset
(-) gain on sale of asset
(+) loss on sale of asset
Adjustments from changes to balances of current assets and liabilities from the balance sheet
(+) decrease in currents assets
(+) increase in current liabilities
(-) increase in current assets
(-) decrease in current liabilities
(=) Net cash flow from operating activities
Methods
Direct method
discloses major classes of:
gross cash receipts
gross cash payments
indirect method
Adjusts profit and loss for:
effects of non-cash transactions
and deferrals or accruals of operating revenue and expenses.
this is the reconciliation or profit/loss with the cash flows from operating activities
Ratios
Cash adequacy ratio
Cash from operating activities/cap exp - Dividends paid
companies ability to re-invest into it's own operations and pay it owners from it's operating cash flow
Cash flow ratio
Cash from op activities/Current liabilities
Liquidity
ability of an entity to meet it financial obligations
Debt coverage ratio
non-current liabilities/ cash from operating expenses
entities ability to survive in the long-term and stay solvent
Cash flow to sales ratio
Cash from operating activities/ net sales
How profitable an entity is
Free cash flow
Cash from operating activities - Capital investments from property, plan and equip to maintain existing operations
Amount of free cash an entity has to pay its debts, dividends and expand operations