Transcript Slide 1

Accounting for Management Decisions
WEEK 6
MEASURING AND REPORTING CASH FLOWS
READING: TEXT CH 5
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
1
Learning Objectives
• Explain why cash is important to the reporting
entity
• Define cash and cash equivalents
• Distinguish between accrual and cash-based
transaction recognition
• Compare and contrast the roles of the three
external financial reports (income statement,
balance sheet, cash flow statement)
• Discuss the three components of the cash
flow statement (operating activities, investing
activities, financing activities)
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
2
Learning Objectives cont’d
• Identify non-cash transactions
• Recognise the alternative approaches to
preparing a cash flow statement
• Prepare a simple cash flow statement
• Prepare a reconciliation of net profit to cash
flow from operations
• Explain how the cash flow statement can be
useful for identifying cash flow management
strengths, weaknesses and opportunities
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
3
The Importance of Cash and Cash Flow
Learning Objective: Explain why cash is important to the
reporting entity
•
is
because organisations and
people will not normally accept any other form of
settlement of claim against the business
• Businesses
as a result of
to find
sufficient cash to settle their responsibilities
• These factors make cash a
asset, and therefore the one analysts and others
carefully in assessing the survival ability
of the business and other factors
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
4
The Importance of Cash and Cash Flow
• Balance sheet and P+L reports show
in wealth and the net
in
wealth for the period concerned
• The cash flow statement is required to be
produced because the above 2 reports
concentrate sufficiently on
(cash flow)
• The
nature of the above 2 reports is
thought to
the question of
and
a company is generating the cash it needs
to continue operating?
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
5
Cash and Cash Equivalents
Learning Objective: Define cash and cash equivalents
represents ‘cash on hand’ and ‘demand
deposits’
• Cash
represent short-term, highly
liquid investments that can readily be
to a fixed amount of cash
• Examples include:
- Cash at Bank
- Bank Overdraft
- Short-term Money Market Deposits
- Bank Bills
•
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
6
Cash vs Accrual transaction recognition
Learning Objective: Distinguish between accrual-based and
cash-based transaction recognition
•
-based -
is recognised when
are recognised
cash is
and
when cash is
•
-based is recognised when
it is
and
are recognised when
they are
• Accrual-based accounting removes the
of the entity’s performance from the cash-based
system and reflects the
of
what has been earned
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
7
Differences between the 3 major external
financial reports
Learning Objective: Compare and contrast the roles of
the three external financial reports
• Balance Sheet – static report made at a given
point in time and based on balances in A, L + OE
normally based on
transactions
• Income Statement (Profit & Loss) – measures
the financial performance over a period of time normally 1 year, related to revenues earned less
expenses incurred ie
transactions
• Cash flow statement – identifies all cash
receipts and cash payments for the period. All
account types are included and is based on cash,
transactions
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
8
Differences between the 3 external financial
reports cont’d
Owners’
claim
Income statement
Balance sheet
at the
of
the accounting
period
Cash
Owners’
claim
Balance sheet
at the
of
the accounting
period
Cash flow statement
Cash
Figure 5.1 - The relationship between the balance sheet, the
income statement and the cash flow statement
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
9
The Cash Flow Statement
Learning Objective: Discuss the three components of the
cash flow statement
• The cash flow statement is basically an analysis
of the business
over the
period concerned
• All payments of a
are added
together to give just one figure, which appears in
the statement
• The net
of the statement is the net
in cash of the business over
the period
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
10
The Cash Flow Statement cont’d
The 3 components of the cash flow statement are:
•
activities - represents net inflows from
, only
received and paid is
featured,
expenses and revenue (reflects
events of Income Statement – cash sales, debtor &
creditor payments, wages, cash expenses, etc)
•
activities - concerned with cash
payments to
and cash receipts for
of NCAs eg plant & machinery, land,
investments, etc
•
activities - deals with financing the
business
short-term credit eg
debt and equity sources, share issues, repayment
of long-term loans, etc
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
11
The Cash Flow Statement cont’d
Net cash flows from
activities
Net cash flow from
activities
Net cash flow from
activities
Net increase/decrease in
cash and cash equivalents
over the period
Figure 5.2 - Standard layout of the cash flow statement
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
12
Non-cash Transactions
Learning Objective: Identify non-cash transactions
•
transactions are transactions that
directly involve cash
•
relate to the ‘operating activity’ section of
the cash flow statement and are linked to the
between cash-based and accrualbased transactions
eg depreciation, doubtful debts, accruals
(receivables, inventory, prepayments,
payables, revaluations etc)
• However,
relate to the ‘
and
activity’ sections too eg direct
exchanges such as shares for assets, noncurrent assets for reduction in debt, bonus issues
from reserves
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
13
Preparation of a Cash Flow Statement - an overview
Learning Objective - Recognise the alternative
approaches to preparing a cash flow statement
Can be produced in 2 ways:
1. Independently viewing the cash receipts and
cash payments for the period and
transactions to the
activities and
categories
1.
the income statement by
the
in the balance sheet for
the period and
any
transactions so that
transactions
, forming the basis for preparing the
cash flow statement
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
14
Preparation of a Cash Flow Statement – an overview
cont’d
Of these 2 ways the 2nd method (reconstructing the
income statement) is most often used. For the
reconstruction,
alternative approaches are used:
1.
using additions and subtractions;
2. Ledger reconstructions;
3. Worksheets.
Only the
(schedule approach) will be discussed
in this chapter as it does not require an
understanding of the formal double-entry accounting
framework
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
15
Preparation of cash flow statement - simple example
Learning Objective: Prepare a simple cash flow statement
Refer to Example 5.1 on p. 231
Deducing cash flows from
activities
1. Calculate cash receipts from customers:
balance of
15
+ sales for the period
+100
gives amount expected to receive from the period
115
-
(20)
=
balance debtors
from customers
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
$
16
Preparation of cash flow statement - simple example
cont’d
Refer to Example 5.1 on p. 231
Deducing cash flows from
activities
2. Calculate payments to creditors for inventory
purchases:
balance of
+
10
of inventory for the period
= amount
-
to be paid for the period
balance creditors
= cash
+ 68
to creditors
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
78
(15)
$
17
Preparation of cash flow statement - simple example
cont’d
Deducing cash flows from
activities
3. Calculate interest paid relating to interest
:
balance of interest payable
+
for the period
gives the amount expected to pay for the period
-
balance of interest payable
= the interest
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
X
+X
X
(X)
X
18
Preparation of cash flow statement - simple example
cont’d
Refer to Example 5.1 on p. 231
Deducing cash flows from
4. Calculate interest paid relating to
balance of
+
activities
interest:
interest
for the period
gives the amount
-
to be paid for the period
balance of prepaid interest
= the
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
0
+3
3
(0)
$
19
Preparation of the cash flow statement - a
simple example cont’d
Refer to Example 5.1 on p. 231
Completing the ‘
’ section
5. Complete ‘cash flows from operating activities’:
Cash
Cash
Income
Net cash
from
to
paid
(63 + other exp 17)
paid (2008 liability)
by operating activities
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
95
(80)
(3)
(4)
$
20
Preparation of cash flow statement - simple example
cont’d
Refer to Example 5.1 on p. 231
Deducing cash flows from
activities:
1. Complete the cash flows from investing section:
Net cash
of property, plant and equipment (10 + 10)
(20)
from
of property, plant & equipment
(0)
in investing activities
$
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
21
Preparation of the cash flow statement - a
simple example cont’d
Refer to Example 5.1 on p. 231
Deducing cash flows from financing activities:
1. Complete the cash flows from financing section:
from
of share capital
of long-term
of long-term borrowings
Dividends
Net cash
by financing activities
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
15
5
(0)
(15)
$
22
Preparation of Cash Flow Statement; eg 5.1, p.235
statement for
Cash flows from operating activities
Cash receipts from customers
Cash payments to suppliers & employees (63 + other expenses 17)
Interest paid
Income taxes paid (2008 liability)
Net cash provided by operating activities
Cash flows from investing activities
Purchase of property, plant and equipment (10 + 10)
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Proceeds from long-term borrowings
Dividends paid
Net cash provided by financing activities
Net decrease in cash and cash equivalents held
Cash and cash equivalents at the beginning of the financial year
Cash and cash equivalents at the end of the financial year
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
$m
95
(80)
(3)
(4)
8
(20)
(20)
15
5
(15)
5
(7)
12
$
23
Reconciling cash from operations with
operating profit
Learning Objective: Prepare a reconciliation of net profit to
cash flow from operations
• Purpose of reconciliation is to
the
net operating
after tax with the cash
flows from
activities
• The
point is the operating profit after tax
• We then effectively
the
charged in arriving at that profit and
this
total by
in non-cash current asset
and current liability accounts to arrive at cash flow
from operations
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
24
Reconciling cash from operations with
operating profit cont’d
Refer Example 5.1 on page 231 for data
Reconciliation would be as follows:
$m
Operating profit after tax
Depreciation
Increase in inventory
Increase in accounts receivable
Increase in accounts payable
Increase in tax payable
Net cash flow provided by operating activities
+5
(8)
(5)
+5
+1
$
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
25
What does the cash flow statement tell us?
Learning Objective: Explain how the cash flow statement
can be useful for identifying cash flow management
strengths, weaknesses and opportunities
• The cash flow statement tells us
the
business
during the period
and where that cash has
• Shows the
/origins and uses of cash
over time, which is indicative of trends and useful
for
future
and
patterns of cash flow
• Provides an
into
management
• Is good indicator of
management practices
• Identifies
flows
Atrill, McLaney, Harvey, Jenner: Accounting 4e © 2008 Pearson Education Australia
26