Cashflow



CashflowINTRODUCTION – THE STATEMENT OF CASH FLOWSA statement of cash flows presents information about the cash flows associated with the company’s main operations and those associated with its investing and financing activities of the period A statement of cash flow functions in conjunction with both the statement of profit or loss (performance dimension) and the statement of financial position IAS 7 statement of cash flows USEFULNESS OF CASH FLOW INFORMATION Ability to generate adequate cash flow is a significant performance dimension Cash flow information clarified the dynamics of short-term liquidity and long-term solvency Cash flow information is an essential input for economic decision models CASHFLOW VS. PROFIT Cash flow and profit are different economic phenomena but linked through the mechanisms of accrual accounting Cash flows are factual details of incoming and outgoing flows of cash while the statement of financial position and the statement of profit or loss emanate from professional judgement are not a direct projection of objective economic data LIQUIDITY / SOLVENCY AND CASH FLOWSLiquidity and solvency ratios are determined on static financial position data, while cash flows reflect changes in financial position Liquidity Relates to nearness to cash of the structure of assets Determined by capacity to convert current assets into cash Solvencyrelates to future availability of cash in order to settle financial liabilities on due date determined by timing and uncertainty of expected future cash payments and cash receipts RELATIONSHIP WITH STATEMENT OF FINANCIAL POSITION AND P/L STATEMENT a statement of cash flows reflects both “profit related” and “non-profit related” activities (investing and financing) with an impact on available cash over the period covered in the statement of profit or loss CASH FLOW CYCLES Cash conversion cycles cash flow through the company continuously in a series of short-term (ST) and long term (LT) conversion cycles the ST cash conversion cycle (operating cycle) relates to the main business operations the LT cash conversion cycles relate to the acquisition, renewal and disposal of intangible and tangle infrastructure and the long-term sourcing of fundsProductive capacity acquired for cash and subsequently consumed during several ST-operating cycles Acquisition and disposal of infrastructure = INVESTING ACTIVITIESExternal sourcing of funds = FINANCING ACTIVITIES Long term and short term cash flow cycles FORMAT AND STRUCTURE OF THE STATEMENT OF CASH FLOWSCASH FLOWS FROM OPERATING ACTIVITIES – DIRECT AND INDIRECT METHOD Cash flows from operating activities Operating activities are primarily the revenue-generating activities of a company Operating cash flow is conceptually most near to “net profit”Main differences:Non-cash income and non-cash expenses (depreciation expense)Timing differences between net profit and underlying cash flow Non-operating items Operating cash flows: examples Receipt from sale of goods and rendering of services (cashing in of receivables included)Receipts from taxes on sales and VATReceipts from royalties, fees, commissions Payments to suppliersPayments to employees Payments of taxes, VAT, fines Operating cash flows – direct vs. indirect method 2 methods for identifying and presenting the operating cash flow:Direct method: engenders the presentation of the most important categories of gross operating cash inflows and cash outflows Indirect method: net operating cash flow is determined by adjusting the (net) profit figure for the 3 types of differences CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES Cash flow from investing activities Investing activities relate to the acquisition and disposal of long-term tangible and intangible assets and other investments Cash flows from investing activities are an indication of the expansion or downsizing of operating capacity ExamplesPayments for newly acquired equipmentReceipts from the disposal of a building Payments for new investments Cash flows from financing activities Financing activities relate to changes in the size and composition of contributed capital and financing debt of the company Examples Receipts from issuing new shares or bondsReceipts from new bank loan Payments for buy-back of sharesRepayments of loans Payments of interest and dividends CONSTRUCTING A STATEMENT OF CASH FLOW Determine the net change in cashCompare beginning and ending balance Identify all transactions of the period leading to a change in cashDirect: analyse movements in the accounts of cash (equivalents) transaction by transactionIndirect: explain net change of cash by analysing all other accounts, knowing that each transaction with an impact on cash also affects a non-cash account Use the information of step 1 and 2 to construct a statement of cash flows according to the formal rulesApplying step 2 Information from operating cash flow is primarily derived from balances in the IS, while information for the 2 other principal categories comes from the statement of financial position (and details in the Notes) Movements in the accounts indicate a change in financial position and further examination is needed to determine if they had a cash impact Check if balances have been impacted by “accrual-based adjustments” or other “non-cash activities” Classifying balance sheet movements as inflows or outflows of cashDISPOSAL OF LONG TERM ASSETS ExampleIncoming cash flows Outgoing cash flows PRESENTATIONAL CHOICES Interest paid can be classified under either operating or financing activities Interest and dividends received can be included in either operating or investing cash flows Starting from net profit or operating profit under the indirect method (with implications for adjustments to be made) Look page 119 – 122 in booklet for presentational examples ................
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