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Master in International business for small
and medium enterprises - MIBS
International Accounting
Michele Fabrizi
Master in International business for small
and medium enterprises - MIBS
Measuring and reporting cash flows
MIBSObjectives
• Discuss the crucial importance of cash to a business
• Explain the nature of cash flow statement and discuss how it can be helpful in identifying cash flow problems
• Prepare a cash flow statement
• Interpret a cash flow statement
MIBS
Relationship between the balance sheet, profit and loss account and cash flow
statement
Profit and loss account
Cash flow statement
Balance
sheet
Balance
sheet
Balance
sheet
Profit and loss account
Cash flow statement
MIBS
State the increase, decrease or no effect on both cash and profit for the following business events:
1. Repayment of a loan 2. Making a sale on credit3. Buying a fixed asset on credit4. Receiving cash from a trade debtor5. Depreciating a fixed asset6. Buying stock for cash7. Making a share issue for cash
Activity 6.2
MIBS
(what is) the cash flow statement
• Summary of the cash receipts and payments over the period concern
• All receipts and payments of a particular type are added together to give just one figure that appears in the statement
• The net total of the statement is the net increase or decrease of the cash of the business over the period
• The C/F statement is now accepted, along with P/L and B/S, as a primary financial statement
MIBS
The relationship between the balance sheet, the P and L account and the cash flow
statement
Balance sheet
at the start of
the accounting
period
Owner’s
claim
Cash
Balance sheet
at the end of
the accounting
period
Owner’s
claim
CashCash flow statement
Profit and loss
account
MIBS
Standard layout of the cash flow statement
MIBS
Diagrammatical representation of the cash flow statement
MIBS
Deducing net cash (in)flows from operating activities
• The direct method involves the analysis of the cash records of the business for the period, picking out all payments and receipts relating to operating activities. Not many businesses adopt this approach.
• The indirect method derives the cash flow statement from profit and loss account and from balance sheet. It is the most popular method.
MIBS
Deducing net cash (in)flows from operating activities
Cash From Sales = Sales - ∆ trade receivables
MIBS
The indirect method of deducing the net cash flow form the operating
activities
plus
plus or minus
equals
plus or minus
plus or minus
Net cash flow from operating
activities
Net operating profit
Depreciation expense
Increase (minus) or decrease
(plus) in stock
Increase (minus) or decrease
(plus) in debtors
Increase (minus) or decrease
(plus) in creditors
- (D stock)
- (D Trade
receivables)
+ (D Trade
Payables)
MIBS
The indirect method of deducing the net cash flow form the operating
activities
plus
Net operating profit
Depreciation expense
These costs are not
monetary! They do not
imply a cash outflow!
MIBS
The indirect method of deducing the net cash flow form the operating
activities
plus
Net operating profit
Depreciation expense
Assume that a new company buys 1000€ of raw materials by cash and
that, by the end of the year, it has sold nothing.
Profit: 0 €
∆ Stock: +1000€
Cash: -1000€
plus or minus
Increase (minus) or decrease
(plus) in stock- (D stock)
MIBS
The indirect method of deducing the net cash flow form the operating
activities
plus
Net operating profit
Depreciation expense
plus or minusIncrease (minus) or decrease
(plus) in stock- (D stock)plus or minus
Increase (minus) or decrease
(plus) in debtors- (D Trade receivables)
Assume that a new company sells goods for 5000€ on credit. No cash
has been received yet.
Profit: +5000 €
∆ Trade receivables : + 5000€
Cash: 0€
MIBS
The indirect method of deducing the net cash flow form the operating
activities
plus
plus or minus
equals
plus or minus
plus or minus
Net cash flow from operating
activities
Net operating profit
Depreciation expense
Increase (minus) or decrease
(plus) in stock
Increase (minus) or decrease
(plus) in debtors
Increase (minus) or decrease
(plus) in creditors
- (D stock)
- (D Trade
receivables)
+ (D Trade
Payables)
Assume that a new
company buys goods for
4000€ on credit. No cash
has been paid yet but goods
has been sold.
Profit: -4000 €
∆ Trade Payables: + 4000€
Cash: 0€
MIBS
Dido Plc
31/12/2013
Net Operating Profit 122
Depreciation 34
1/1/2013 31/12/2013
Stock 15 17
TradeReceivables
24 21
Trade Payables 18 19
MIBS
Dido’s Net cash flow from operating activities
Net operating Profit 122
Add depreciation +34
Less Increase in Stock -2
Add Decrease in Receivables +3
Add Increase in Payables +1
Net cash (in)flow from operating activities
158
