Slide 15.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 15 Reporting cash flows

Slide 15.1

Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011

Chapter 15

Reporting cash flows

Slide 15.2


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


See text book for data used in illustration

Section 15.3.

Direct and indirect methods

Slide 15.4


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


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


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


£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


Indirect method – operating cash flow (Continued)

Table 15.5 Format for statement of cash flows, indirect method (Continued)


15 Interest paid (xx)

16 Taxes paid (xx)

17 Net cash inflow from operating activities xx

Slide 15.9


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


Slide 15.10


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


Slide 15.11


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


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


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


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


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


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


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


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


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


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


Notes (Continued)

Check on calculations:

• Lines 29 + 30 = Line 31.

Slide 15.22


£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)


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


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


Direct method

• Investing cash flows and

• Financing cash flows.

Are the same as those for indirect method.

Slide 15.25


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


Summary (Continued)

The indirect method and the direct method are alternative approaches to calculating the cash flow arising from operating activities.

Slide 15.27


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


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.

Documents

Slide 15.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 15 Reporting cash flows