1. Understanding & Managing Finance Presentation 6 Cash Flow Statements

2. Week 6 – Cash Flow Statements Learning outcomes: Understand the purpose of the Cash Flow Statement Know the format of a Cash Flow Statement and understand the terms which comprise it. Be able to amend a Cash Flow Statement as a result of transactions Construct a Cash Flow Statement from information given Derive a the net cash flow from operating activities from the information in a Balance Sheet and the Profit & Loss Account.

3. The Cash Flow Statement  Cash is critical to the ongoing survival of an organisation - employees and suppliers will (sooner or later) require payment in “cash”  Traditional financial statements (Profit & Loss Account and Balance Sheet) do not necessarily highlight the cash- flow position  New Financial Standard (1991) required all except the smallest companies to publish Cash-Flow Statements  Cash-Flow Statement = Summary of all cash movements over a period of time

4. 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 Cash Cash flow statement Profit and loss account The relationship between the balance sheet, the profit and loss account and the cash flow statement

5. Equity Dividends paid Financing Capital expenditure Returns from investment and servicing of finance Taxation Management of liquid resources Operating activities Cash balance Elements of the Cash Flow Statement Inflows and Outflows

6. plus or minus equals plus or minus Increase or decrease in cash over the period Net cash flow from operating activities Returns from investment and servicing of finance Taxation Capital expenditure Equity dividends paid Management of liquid resource Financing Standard layout of the cash flow statement

7. CASHFLOW STATEMENT STANDARD FORMAT Net Cash-flow from Operating Activities (Receipts from Cash sales and debtors less payments for stocks, wages, rent etc) +/- Returns from investment and servicing of finance (Receipts of interest etc less payments of interest and other fixed returns) +/- Taxation (Receipts of tax less payments of tax during the period) +/- Capital Expenditure (Receipts from sale of fixed assets less payments made to purchase fixed assets) - Equity Dividends paid (Payments of dividends to shareholders) +/- Management of liquid resource (Sale or purchase of disposable investments) +/- Financing (Input or redemption of long-term borrowings) = Increase or Decrease in Cash over Period These items must come exactly in this order They are + or - depending on whether the cash flows IN or flows OUT

8. CASHFLOW STATEMENT - EXAMPLE Net Cash-Flow from Operating Activities300,000 Returns from investment and servicing of finance100,000- Taxation 30,000- Capital Expenditure150,000- ----------- Subtotal 20,000 Equity Dividends paid 30,000- ----------- Subtotal 10,000- Management of liquid resource - disposal of investments 10,000+ Financing - additional long-term loan 50,000+ ----------- = Increase or Decrease in Cash over Period 50,000+

9. Cash Flow Statement – A Summary  Shows how cash has been generated & where it has gone  A negative cash flow from operating activities may tell us that the business is trading unprofitably, or there may be other reasons (e.g. expansion requiring additional cash)  The subtotal after “Capital Expenditure” highlights the Cash Flows from ”normal” activities  The subtotal after “Equity Dividends” highlights additional external borrowings used to support trading  Note That: The Cash Flow Statement can be generated from figures incorporated in the P & L Account and this year’s and last year’s Balance Sheets

10. Net Cash-Flow from Operating Activities Probably the most important element on the Cash Flow Statement is the ‘Operating Activities’ This gives the cash flow summary of the day-to-day workings of the business. There are two ways that this can be calculated: The Direct Method: Analysing receipts, invoices and cash book transactions for the business over the period in question. The Indirect Method: This uses a combination of the information from the P & L account and Balance Sheets to deduce the Net Cash-flow from Operating Activities (See McLaney & Atrill - pages 154-158 for further examples)

11. plus plus or minus equals 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 Decrease (minus) or increase (plus) in creditors Summary of the indirect method of deducing The net cash flow from operating activities

12. Seminar 6 - Activities  Preparation: M & A Chapters 6  Cash Flow Activity (Word Document)  M & A Exercise 6.7 (pages 192- 193) In order to do this you will need to first of all calculate the net cash flow from operating activities, and then use this figure to start the Cash Flow Statement.