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17- SOCF - Coggle Diagram

- - - - Pressure from investors to either invest into investment projects or pay out as dividends
      - Employees demand rise in salary, bonus
      - Lenders may think that future repayments will be eased (positive)
        They may think that the entity does not require funds anymore (negative)
  - - - This gives indication of how good the company is at turning profits into cash
    - - If it is profit making but no cash is generated, is the profit being manipulated? Or is it due to movement in WC?
    - - Profit or loss?
      - Why the entity sold the PPE?
    - - Is there good return?
      - Any investment income?
      - Does the entity have strong or weak treasury management
      - Is there gain or loss on investment?
    - - Any increase or decrease?
      - Does this show strong or weak management of working capital?
      - Alternative views
        
        Suppliers may be scared if poor management of WC because this indicates credit risk and may impose stricter credit terms
        
        Bank or other lender may be ready to help entities with WC deficits
        
        Info in CSOCF is often not meaningful to creditors, who is interested in the repayment of their money
        
        One of the group companies can have declining profits but this is not shown in the CSOCF
        
        The degree to which the CSOCF gives faithful representation of cash position of individual group companies depends on the degree of deviation of the individual statement from the group statement
      - Acquire a subs in a different industry
        
        For example, retailer who usually does not offer credit to customers might acquire subs with higher receivables
    - - Has any loan been taken in the year?
      - Has any loan been repaid?
      - Has any interest been paid in the year?
    - - cash operating activities are principally derived from the key trading activities
      - this would include cash receipts from sale of goods, cash payments to suppliers and cash payments on behalf of employees
      - The indirect method adjust the profit or loss for the effect of transaction of
        
        non-cash nature
        
        any deferrals or accruals from past or future operating cash receipts and payments
        
        any items of income or expense associated with the investing or financing activities
    - - cash contributions
        
        represents an operating cash payments to be received by the entity's employees. therefore needs to be deducted
      - remeasurement gain or loss
        
        can be ignored as it is neither a cash operating expense component
      - benefits paid
        
        cash outflows for the pension scheme rather than the entity
      - past service cost
        
        non-cash nature
    - - adjusted so that the timing diff between cash is received or paid and when the items are accrues in the financial statements are accounted for
- - - - Cash outflows- financing
    - - Cash inflows - investing
    - - Investing
    - - The cash paid to buy shares or received on selling shares
      - The cash or overdraft balance consolidated/ deconsolidated for the first time
      - These two cash flows should be netted off and shown as a single line item in the investing section
    - - Accounting expenses rather than cash outflows
      - Added back to the PBIT
- - - - Preferred by IAS 7
      - More likely to be more understandable by users
        
        users can see and understand actual cash flows, and how they relate to income or expense
        
        for example, cash payments are shown as cash disbursement and deducted from cash receipts
        
        in this way, users can understand the cash payments and receipts in the period
      - preferred by users as it present information that is not presented elsewhere in the financial statements, which could be of use when estimating future cash flows
    - - Rarely used in practice because companies' systems do not usually collect the type of data required in an easily accessible form
      - bad for investors
        
        reduce shareholders return as it is more time consuming and expensive due to extra working required to ascertain gross cash receipts and payments relating to operating activities
    - - Gross cash receipts and gross cash payments
  - - - Interest presented as cash outflow in either operating or financing
        
        IAS 7 permits either section but the principal will be classified as financing
    - - Can be shown as operating or financing
        
        This means that users have to make adjustments when making comparisons
    - - Inconsistent due to the purpose
      - For example, research expenditure are presented within operating but stakeholders consider it to be long term and therefore should be presented within investing, but it is not permitted by IAS 7.
- - - - Direct method
        
        Is encouraged where the necessary information is not too costly to obtain
        
        Companies ought to monitor their cash flows carefully enough on an ongoing basis to be able to use this method at minimal extra cost
      - Indirect method
        
        Much easier to prepare therefore in practice, direct method is rarely used
        
        adjust the accrual basis profit or loss and convert it into cash flow information by means of add-backs or deductions
        
        adjust the net profit or loss for the items such as
        
        the movements in working capital
        
        non-cash nature
        
        items which relate to cash flows from investing and financing activities such as the proceeds from the sale of PPE or share of dividends received from associate
        
        benefit
        
        from view of preparers, easier to use, therefore nearly all companies use it in practice
        
        cheaper thus will result in higher shareholder return
        
        drawbacks
        
        users find it difficult to understand, therefore open to manipulations
        
        this is true with regards to the classification of cash flows
        
        companies wish to classify cash inflows as operating cash flows and cash outflows as non-operating cash outflows