M7: Statement of Cash flow Flashcards
(23 cards)
What are the benefits and limitations of a statement of cash flows?
Benefits:
- Investor Confidence
- The SOCF promotes transparency and accountability and builds investor confidence.
- Measuring a company’s liquidity
- The SOCF allows users to measure liquidity and to analyse the differences between profits and
cash. It highlights a company’s ability to meet its ongoing financial commitments.
- Showing the differences between profits and cash
- Profit has been described as ‘opinion’ whereas cash has been described as ‘fact’. The SOCF is not
affected by different judgements in accounting policies or ‘aggressive accounting’ practices.
- Providing an early warning system
- Beyond reporting, a SOCF allows users to monitor liquidity issues and ensure that a company
remains a going concern. Ongoing operational cash outflows flows may suggest operational
concerns including difficulties with cost management and falling revenue.
Limitations:
- It is backward looking: historical reconciliation of cash and cash equivalents that can be out of
date by the time users view the financial statements.
- Open to manipulation: cash management, i.e. when payments are made, can be. This may ‘improve’ a company’s financial health in the short-term but may mislead users of the financial statements.
- Should not be viewed in isolation: A SOCF is a measurement of a company’s liquidity, but this is not the same as profitability.
What would a user want to know about the cash flows of a company?
What are the liquid assets of a company?
How do we remember our movement in working capital from the Balance sheet?
AIRLIA - WORKING CAPITAL
Inventories + Trade and other receivables
Assets Increase Remove
Liabilities Increase Add
AIRLIA = ACRONYM TO REMEMBER WORKING CAP.
What is the proforma for Statement of Cash flow?
Operating
Cash generated from operating activities
Net cash generated from CASH INFLOW/CASH OUTFLOW operating activities
Investing
Net cash generated from CASH INFLOW/ used in CASH OUTFLOW investing activities
Financing
Net cash generated from CASH INFLOW/ used in CASH OUTFLOW financing activities
Net increase/decrease in cash and cash equivalents
Cash & Cash equivalent at start of year
Cash & Cash equivalent at end of the year
What is the format for operating activities?
Operating activities:
Profit before tax = X
CASH ITEMS BUT NOTHING TO DO WITH OPS:
Interest expense XX
Interest Received (XX)
Dividends Received (XX)
NON-CASH ADJUSTMENTS:
Depreciation
Amortisation
Impairments
(Gain)/Loss on disposal of PPE
(Gain)/Loss from financial reclassified to FVTPL
(Gain)/Loss from FV Re-valuation of Invest. property
(Gain)/Loss from derivatives held for trading
WORKING CAPITAL ADJUSTMENTS:
(Increase)/decrease in Inventories
(Increase)/decrease in Trade and other Recev.
(Increase/(decrease) in Trade and other Payable
Increase/(decrease) in Provisions
Cash generated from/(used in) operating activities = X
Interest paid
Income taxes paid
NET CASH FROM/(USED IN) Operating activities
What is the way to remember the pro-forma for Operating activities?
Top, middle, lower, bottom
Top section = PBT - Cash but nothing to do with operations
Middle = Non-cash adjustments
Lower = Working capital adjustments
Bottom = Interest paid, income tax paid = Net CASH
How do we calculate taxation paid (which is included within operating activities)?
Opening tax payable (SFP)
Add: Taxation expense for the year (SPL)
Less: Closing tax payable (SFP)
= Income taxes paid (Bal. Fig)
How do we calculate interest paid (which is included within operating activities)?
Opening interest accrual (SFP)
Add: Finance charge expense (SPL)
Less: Closing interest accrual (SFP)
= Interest paid (Bal. Fig)
How does the infrastructure that supports the business generate cash (excluding cash from
the daily operations)?
How does the infrastructure cause a cash outflow?
What is the cash paid for acquisitions formula for investing activities?
Opening carrying amount
Plus/Less revaluations (movements in the revaluation reserve)
Less depreciation
Less impairments
Less carrying amount of disposals
Less closing balance
= TOTAL CASH PAID.
What is the pro-forma for investing activities?
Acquisition of PPE (XX)
Acquisition of Intangibles (XX)
Acquisitions of any other non-current assets (XX)
Proceeds on sale of PPE XX
Proceeds on sale of held for sale assets XX
Proceeds on sale of intangibles XX
Proceeds on sale of any other non-current assets XX
Dividends received
= Net cash used in investing activities
How do you work out Acquisitions for PPE & ROU Asset for investing activities?
Opening balance
+ Revaluation
- Depreciation
- Carrying amount on disposal
- Closing balance
= Acquisitions total
How do you work out Intangible assets for investing activities?
Opening balance
- Intangible impairment
- Amortisation
- Closing balance
= Acquisitions total
How do you work out investment property for investing activities?
Opening balance
+ FV Gain
- Closing balance
= Acquisitions total
How do you work out held for sale for investing activities?
Opening balance
- Disposals
- Closing balance
= Acquisitions total
What is the proceeds on sale formula under investing activities?
Carrying amount of asset sold
Plus gain on sale
Less loss on sale
Less trade-in value of assets traded in
= PROCEEDS
How is a business financed?
What are the cash inflows and outflows relating to this finance?
What is the pro forma for financing activities?
Proceeds from issue of new shares XX
Proceeds from increased long-term borrowing XX
Cash outflow from share buy-backs (XX)
Capital repayment of lease liability (XX)
Capital repayments of long-term borrowings (XX)
Dividends paid (XX)
= Net cash generated from/used in financing activities
What is the dividends paid formula under financing activities?
Opening retained earnings XX
Profit XX
Transfer of convertible debt reserve XX
Issue of bonus shares from RE (XX)
Closing retained earnings (XX)
= Dividends paid
What is shares issued during the year formula under financing activities?
Opening balance
Conversion of debt
Bonus issue
Closing balance
= Issue of shares
