2 Overview Purpose of the statements of cash flows Classification of cash flowsPreparation of Statement of Cash Flows
3 Terminology Cash? Cash Flow? Cash on Hand Demand Deposits Cash Equivalents: short-term, highly liquid investments.Cash Flow?Cash flows are inflows and outflows of cash and cash equivalents.
4 The purpose of the Statement of Cash Flows The Statement of Cash Flows provides information about cash receipts, cash payments and the net change in cashIt helps to answer the following questions:Where has the entity spent the cash?Where did it receive cash from during the period?What has been the change in the cash balances?What can the entity generate in terms of future cash flow?
5 Cash Sources (Inflows) Uses (Outflows) 1.Receive Revenue 1.Pay ExpensesOperating Activities2.Sale of long-term assets2.Purchse of long term assetsInvesting Activities3.Investment by the owners3.Withdraw by the owners/Dividends4.Long-term borrowing4.Repayment of long-term debtsFinancing Activities
6 Classification of Cash Flows Cash flows from operating activitiesCash flows arising from providing goods and services and that are not classified as financing or investing activities (NZ IAS 7.6).The cash flows generally arise from transactions affecting the Income Statement.Examples include:Cash receipts from the sale of goods and services, the payment to suppliers for goods and services, payment to employees (wages).
7 Classification of Cash Flows Cash flows from investing activitiesCash flows arising from the purchase and sale of long-term assets and other investments (not included in cash equivalents) (NZ IAS 7.6.).Examples include:cash receipt (payments) from the sale (purchase) of property plant and equipment.
8 Classification of Cash Flows Cash flows from financing activitiesCash flows arising from the activities relating to owners contributed equity and borrowings. (NZ IAS 7.6).Examples include:Cash received from obtaining a loan ; Cash paid to repayment of a loan; Obtaining cash from shareholders; Paying dividends.
9 Operating / Investing / Financing ExerciseFor each of the following transactions indicate: (a) in the first column if the transaction is a receipt or payment of cash, and (b) in the second column, classify the cash transaction as operating, investing or financing.TransactionReceipt / PaymentOperating / Investing / FinancingWages paidReceived interestAdvertising expense paidPaid dividendsCash salesPaid commissionInterest paid on loanIncreased loanIssued shares for cashSold goods on creditPaid for shop fittingsOwner took goods for own usePaid creditorsCash purchasesCredit purchasesOwner invested cashSold delivery vanLoss on sale of delivery vanCredit salesReceived payment on accountBad debtsDepreciation expenseCash drawings
10 Classification of interest , dividends paid and received Interest paid can be classified as cash outflow from operating activities because it is included in the determination of the income statement OR it can be treated as financing cash flows because interest is a cost of obtaining funds ( NZIAS 7. 33).Interest and dividends received can be classified as cash inflow from operating activities because they are included in the determination of the income statement OR they can be treated as cash inflow from investing activities because they are returns on investments ( NZIAS 7. 33).Dividends paid can be treated as cash outflows from financing activities because they are party of the cost of obtaining funds for the business. However, IAS 7.34 also allows dividends paid to be classified as operating cash flows as they enable users to assess the ability of the entity to pay dividends out of cash flows from operations.
11 Classification of interest , dividends paid and received Interest paid and received – operating activitiesDividends received – operating activitiesDividend paid – financing activities
12 Format of Cash Flow Statement Cash flow from operating activitiesCash receiptsCash paymentsNet cash flow from operating activitiesCash flow from investing activitiesNet cash flow from investing activitiesCash flow from financing activitiesNet cash flow from financing activitiesNet increases (decrease) in cashCash at beginning of periodCash at end of period
13 Preparation of Cash Flow Statement Information requiredA balance sheet for two consecutive accounting periods so that changes in asset, liability and equity accounts can be identified.The income statement covered between the two balance sheet periodsAdditional data relating to particular transactions.
14 The steps to undertake in preparing the Statement of Cash Flow Step 1 Determine the net increase /decrease in cash for the period.Step 2 Determine cash flows from operating activities.Step 3 Determine cash flows from investing activitiesStep 4 Determine cash flows from financial activitiesStep 5 Complete the Statement of Cash Flows
16 Step 2 cash flows from operating activities Cash receipts from operationsCash payments from operationsFor sale of goods and services to customersFor suppliesInterest and dividends from investmentsFor employeesFor operating expensesFor interestFor taxes
17 Cash from CustomersCash Received from Credit Customers + Cash Received From Cash Customers = Total Cash Received From Customers
19 Cash paid to suppliersCost of Goods Sold Plus: Ending Inventory Less: Opening Inventory = Purchases from Suppliers Add: Opening Accounts Payable Less : Closing Accounts Payable = Cash payments TO SUPPLIERS
20 QUESTIONS Calculate the payments to suppliers: Cost of sales - $429,800Opening inventory - $39,200Closing inventory - $25,600Accounts Payable at beginning - $42,600Accounts Payable at end - $21,000
21 Cash payments for expenses: adjusting for prepaid expenses Expense from Income Statement Less: Opening Prepayments Plus: Closing Prepayments = Cash payment for EXPENSE
22 Cash payments for expenses: adjusting for accrued expenses Expense from Income Statement Plus: Opening Accrued Expense Less: Closing Accrued Expense
23 QUESTIONS(a) Total operating expenses as shown in the Income Statement for the year ended 31 March 2005 were $130,500. Prepaid expenses at the beginning and at the end of the year were $20,000 and $35,000 respectively. Accrued expenses at the end of the year were $8,350. Work out the payments for operating expenses for the year ended 31 March 2005. (b) Calculate the tax payments for the year, based on the information provided below: Tax expense $22,000Tax Payable:Beginning balance $16,000Ending balance $19,000
24 Step 3 Determine cash flows from investing activities One of the main investing activities is the purchase and sale of property plant and equipment. The relevant cash flows are the cash paid to acquire the asset and the cash proceeds from selling an asset. This will require reconstructing the PPE asset and Accumulated Deprecation accounts.
27 Step 4 Determine cash flows from financial activities
28 Cash flow from financing activities Cash was provided from:Issue of shares $20,000Cash was applied to:Repayment of bank loan ($50,000)Payment of Dividend (62,000) ,000Net cash outflow from financing activities ($92,000)
29 Step 5 Complete the Statement of Cash Flows This step requires completing the cash flow statement ensuring the net increase in cash plus the opening position equals the closing cash position.