EBF1033: BASIC ACCOUNTING

EBF1013: ACCOUNTINGLU3: FINAL ACCOUNTS CASH FLOW STATEMENTS1PreviouslyFinancial Statements:AdjustmentsTrading, Profit & Loss AccountBalance Sheet2ObjectiveAt the end of the lecture, students will be able to understand the:Definition of cash flowsPurposes of cash flows statementOperating activitiesInvestment activitiesFinancing activitiesConstruction of cash flow statements3DefinitionCash flow statement: a statement which shows how cash is generated & used by business entities throughout a certain accounting period.Where the cash has come from & exactly what we have done with it during the year.4PurposesProfit/loss does not give accurate picture of the economic position of a business because some item do not involve cash in Profit & Loss Account.Final accounts can be manipulated in terms of estimations figures but not cash.Cash flows highlight business with shortage in cash even though they are making profits.5Operating activitiesTransactions that affect the revenues & expenses & influence the net profit/loss of the business.Involve items in Profit & Loss Account, current assets & current liability.6Operating activitiesCash flows from operating activitiesCash in: Decrease CAIncrease CLProfitsCash out:Increase CADecrease CLLosses7Operating activitiesCash in:Decrease in receivables repayment of debtsDecrease in inventory sale of inventoryIncrease in current liabilities borrow money (short term loans), borrow money from creditors/accounts payableCash out:Increase in receivables debtors borrow moneyIncrease in inventory buy more inventoryDecrease in current liabilities repay creditors/accounts payable8Investing activitiesAcquiring & disposing long-term/non-current assets (FA)Involve fixed assets9Investing activitiesCash flows from investing activitiesCash in:Sale of FACash out:Purchase of FA10Financing activitiesObtaining cash / repayment of long-term loan from external parties (bank loans, bonds & debentures) & issuance of sharesInvolve long-term liabilities & shareholders (or owners) equity.11Financing activitiesCash flows from financing activitiesCash in: Introduce capitalSale of sharesReceive long-term loanCash out:DrawingsDividends paidPayment of long-term loan12Construction of cash flow statementsTwo methods: Indirect & Direct methodsIndirect method:

Statement of cash flows for the year ended Cash flows from operating activitiesNet profitxxxAdjustments on net profit to get net cash flows from operating activities: Increase or (decrease)xxxCash flow from investing activitiesxxxCash flow from financing activitiesxxxNet increase (decrease) in cashxxxCash balance at the beginning of the periodxxxCash balance at the end of the periodxxx13Construction of cash flow statementsDirect method:

Statement of cash flows for the year ended Cash flows from operating activitiesTotal cash receipt from operating activitiesxxxCash paid from operating activitiesxxxCash flow from investing activitiesxxxCash flow from financing activitiesxxxNet increase (decrease) in cashxxxCash balance at the beginning of the periodxxxCash balance at the end of the periodxxx14Example 1Balance sheet as at 31.12.10 and 31.12.1131.12.1031.12.11Fixed assetsRMRMRMRMPremises25,00028,800Current assetsInventory12,50012,850Receivables21,65023,140Cash & bank4,3005,62038,45041,160Less: Current liabilitiesPayables11,35027,10011,12030,49052,10059,29015Example 1Required: Draw the Cash Flow Statements using indirect method.Balance sheet as at 31.12.10 and 31.12.1131.12.1031.12.11Financed by:RMRMRMRMCapital52,60052,100Add: Net profit16,55025,44069,21077,540Less: Drawings17,11018,25052,10059,29016Example 1: AnswerCash Flow Statement for the year ended 31.12.11 Cash flows from operating activitiesNet profit25,440Adjustments on net profit to get net cash flows from operating activities:-Increase in inventories350-Increase in debtors1,490-Decrease in creditors230(2,070)Net cash flow from operating activities23,37017Example 1: AnswerNet cash flow from operating activities23,370Cash flow from investing activities-Purchase premises(3,800)Net Cash flow before financing activities19,570Cash flow from financing activities-Drawings(18,250)Net increase (decrease) in cash1,320Cash balance at the beginning of the period4,300Cash balance at the end of the period5,62018SummaryCash flow fromIncreaseDecreaseOperatingDecrease CAIncrease CAIncrease CLDecrease CLProfitsLossesInvestingSale FAPurchase FAFinancingIntroduces capitalDrawingsSale of sharesDividends paidReceived long-term loanPayment of long-term loan19