Slide 15.1
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Chapter 15
Reporting cash flows
Slide 15.2
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Definitions
Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Slide 15.3
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
See text book for data used in illustration
Section 15.3.
Direct and indirect methods
Slide 15.4
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Direct method
Table 15.3 Direct method
25Operating cash flow
(20)Wages paid
(58)Cash paid to suppliers
103Cash received from customers
£
Slide 15.5
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Indirect method
Table 15.4 Indirect method
25Operating cash flow
(3)(Decrease) in payables
3Decrease in receivables
(15)(Increase) in inventory
40
10Add back depreciation
30Operating profit
£
Slide 15.6
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Which to choose – direct or indirect ?
• Both are allowed by IAS 7.
• Both give the same answer for operating cash flow.
• Indirect method emphasises management of working capital.
• Direct method gives information not available elsewhere in the annual report.
Slide 15.7
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
£m £m
1 Cash flows from operating activities
2 Profit before taxation xx
3 Adjustment for items not involving a flow of cash:
4 Depreciation, amortisation, gain or loss on disposal of non-current assets etc xx
5 Adjusted profit xx
6 (Increase)/decrease in inventories xx
7 (Increase)/decrease in trade receivables xx
8 (Increase)/decrease in prepayments xx
9 Increase/(decrease) in cash due to (increases)/decreases in current assets xx
10 Increase/(decrease) in trade payables xx
11 Increase/(decrease) in accruals xx
12 Increase/(decrease) in cash due to increases/(decreases) in liabilities xx
13 Increase/(decrease) in cash due to working capital changes xx
14 Cash generated from operations xx
Indirect method – operating cash flow
Table 15.5 Format for statement of cash flows, indirect method
Slide 15.8
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Indirect method – operating cash flow (Continued)
Table 15.5 Format for statement of cash flows, indirect method (Continued)
14 Cash generated from operations xx
15 Interest paid (xx)
16 Taxes paid (xx)
17 Net cash inflow from operating activities xx
Slide 15.9
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Net cash used in investing activities xx23
Dividends received xx22
Interest received xx21
Proceeds from sale of non-current assets xx20
Purchase of non-current assets xx19
Cash flows from investing activities18
Indirect method – cash flows from investing
Table 15.5 Format for statement of cash flows, indirect method (Continued)
Slide 15.10
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Cash and cash equivalents at the end of the period xx31
Cash and cash equivalents at the start of the period xx30
Increase/(decrease) in cash and cash equivalents xx29
Net cash used in financing activities xx28
Dividends paid xx27
Proceeds from long-term borrowing xx26
Proceeds from issue of share capital xx25
Cash flows from financing activities24
Indirect method – cash flows from financing
Table 15.5 Format for statement of cash flows, indirect method (Continued)
Slide 15.11
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Notes
Line 1: Cash flows from operating activities• Shows how cash flows are generated from the
operations of the business.Line 2: Profit before taxation• Starts with the operating profit before deducting
interest and taxation.Line 3: Adjustment for items not involving a flow of cash• Depreciation, amortisation, provisions, unrealised gains and losses.
Slide 15.12
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Notes (Continued)
Line 4: Adding back depreciation, amortisation, gain or loss on disposal etc• Add back because these items are not part of
cash flow and are therefore not needed.Line 5: Adjusted profit• Subtotal line.Line 6: (Increase)/decrease in inventories (stocks)• Increase inventories, use up cash. Reduce inventories, release cash.
Slide 15.13
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Notes (Continued)
Line 7: (Increase)/decrease in trade receivables (debtors)• Increase debtors, reduce cash flow. Decrease
debtors, increase cash flow.Line 8: (Increase)/decrease in prepayments• Increase prepayments, use more cash.Decrease prepayments, reduce the need for cash.Line 9: Increase/(decrease) in cash due to (increases)/decreases in current assets• Subtotal.
Slide 15.14
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Notes (Continued)
Line 10: Increase/(decrease) in trade payables (creditors)• Increase creditors, reduce the need for cash.
Decrease creditors, use up cash faster.Line 11: Increase/(decrease) in accruals• Increase accruals (unpaid expenses), reduce the
need for cash. Reduce accruals, use up cash faster.
Line 12: Increase/(decrease) in cash due to increases/(decreases) in liabilities• Subtotal.
Slide 15.15
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Notes (Continued)
Line 13: Increase/(decrease) in cash due to working capital changes
• Subtotal for change in current assets minus change in current liabilities.
Line 14: Cash generated from operations
• Subtotal.
Line 15: Interest paid
• Cash paid in the period.
Slide 15.16
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Notes (Continued)
Line 16: Taxes paid
• Cash paid in the period.
Line 17: Net cash inflow from operating activities
• Subtotal.
Line 18: Cash flows from investing activities
• Start of second major section.
Slide 15.17
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Notes (Continued)
Line 19: Purchase of non-current assets• Cash paid for non-current (fixed) assets.Line 20: Proceeds from sale of non-current assets• Cash received (this is not the same as gain or loss on disposal).Line 21: Interest received• Cash received as interest on deposits or loans made.
Slide 15.18
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Notes (Continued)
Line 22: Dividends received• Cash received as dividends on shareholdings.Line 23: Net cash used in investing activities• Subtotal. Line 24: Cash flows from financing activities• Start of third major section.
Slide 15.19
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Notes (Continued)
Line 25: Proceeds from issue of share capital
• Cash received equals increase in nominal value plus increase in share premium reserve.
Line 26: Proceeds from long-term borrowings
• Cash received from lenders.
Line 27: Dividends paid
• Dividends paid during the financial year (usually proposed dividend from previous year plus interim of current year).
Slide 15.20
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Notes (Continued)
Line 28: Net cash used in financing activities
• Subtotal.
Line 29: Increase/(decrease) in cash and cash equivalents
• Total of lines 17 + 23 + 28 (sum of each main section).
Lines 30 and 31: Cash and cash equivalents at the start and end of the period.
• Taken from the balance sheet.
Slide 15.21
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Notes (Continued)
Check on calculations:
• Lines 29 + 30 = Line 31.
Slide 15.22
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
£m £m
1 Cash flows from operating activities
2 Cash receipts from customers xx
3 Cash paid to suppliers xx
4 Cash paid to employees xx
5–13 (Lines not used)
14 Cash generated from operations xx
15 Interest paid (xx)
16 Taxes paid (xx)
17 Net cash inflow from operating activities xx
Direct method – operating cash flow
Table 15.6 Format for statement of cash flows, direct method
Slide 15.23
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Direct method – operating cash flow (Continued)
Line 2: Cash receipts from customer• Cash received from customers• (Check that cash received = Sales of the period +
receivables at start – receivables at end).Line 3: Cash paid to suppliers• Cash paid to suppliers. • (Check that cash paid = Purchases of the period +
payables at start – payables at end).Line 4: Cash paid to employees• Usually there are no wages or salaries unpaid at the end
of a period.Lines 14–31 Same as for indirect method
Slide 15.24
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Direct method
• Investing cash flows and
• Financing cash flows.
Are the same as those for indirect method.
Slide 15.25
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Summary
Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Slide 15.26
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Summary (Continued)
The indirect method and the direct method are alternative approaches to calculating the cash flow arising from operating activities.
Slide 15.27
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Summary (Continued)
The indirect method starts with the profit from operations, eliminates non-cash expenses such as depreciation, and adds on or deducts the effects of changes in working capital to arrive at the cash flow arising from operating activities.
Slide 15.28
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Summary (Continued)
The direct method takes each item of operating cash flow separately from the cash records to arrive at the cash flow arising from operating activities.
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