Chapter  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 1 STATEMENT OF CASH FLOWS LEARNING OUTCOME:  TO RECORD INFORMATION TO PREPARE A STATEMENT OF CASH FLOWS FOR ‘NON-REPORTING’ BUSINESSES ADHERING TO THE REQUIREMENTS OF ACCOUNTING STANDARD AASB

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 2 KEY TERMS  cash  cash equivalents  cash flows  cash on hand  classification of a cash-flow statement  debentures  financing activities

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 3 KEY TERMS  government bonds  investing activities  non-cash items  operating activities  statement of cash flows  taxation payable  unsecured notes

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 4 PURPOSE OF CASH-FLOW STATEMENTS  Shows the liquidity of the business and its ability to meet short-term commitments  Allows owners and investors to understand the relationship between cash flows and profits or losses

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 5 PURPOSE OF CASH-FLOW STATEMENTS  Analysis of cash-flow information is useful to ensure: ÙLiquidity of business is maintained ÙBusiness is able to meet commitments ÙBusiness is in a position to raise funds ÙCash-flow deficiencies come to light

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 6 PURPOSE OF CASH-FLOW STATEMENTS  Shows cash position at start and end of period, and the cash movements between  Management should optimise cash-flow success by: Ùfrequent monitoring Ùregular banking and debt collection Ùinvesting excess cash Ùpaying accounts on due date and not before

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 7 ACCOUNTING STANDARD AASB 1026  Requires ‘reporting entities’ to include general purpose report (statement of cash flows) with published financial reports  Features of the standard include: ÙCash flow must be classified ÙStatements must show all flows for accounting period and disclose inflows and outflows ÙNotes on reconciliation of cash and net cash

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 8 ACCOUNTING STANDARD AASB 1026  Standard proposes use of ÙDirect method xcash items used in main part of cash-flow statement ÙIndirect method xthe reconciliation of operating activities with net-profit includes non-cash expenses such as depreciation and doubtful debts

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 9 CLASSIFICATION OF CASH-FLOW STATEMENTS  OPERATING ACTIVITIES ÙActivities relating to provision of goods and services e.g. xreceipts for provision of goods and services xpayments to suppliers xpayments of salaries and wages xpayment of business operational expenses xrevenue items such as rent received ÙAlso include any activities that are not investing or financing xinterest received and interest paid xdividends received xtaxes paid

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 10 CLASSIFICATION OF CASH-FLOW STATEMENTS  INVESTING ACTIVITIES ÙActivities are for acquisition and disposal of non-current assets e.g. xbuying non-current assets xproceeds from sale of non-current assets

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 11 CLASSIFICATION OF CASH-FLOW STATEMENTS  FINANCING ACTIVITIES ÙActivities that relate to change in business’s financial structure or size, including equity and borrowings e.g. xproceeds from owner contributing more capital xraising capital through loans xrepayments of loans xdrawings in cash by owner

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 12 NOTES AT FOOT OF STATEMENT OF CASH FLOWS  Reconciliation with the closing cash at bank balance  Reconciliation of operating cash flows with the net profit

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 13 RECONCILIATION WITH CLOSING CASH AT BANK BALANCE Reconciliation with the cash at bank account Net increase in cash held $ Bank overdraft as at 1 July 2008 ($20 000) Cash balance as at 30 June 2009 $ Illustration 9D (page 234)

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 14 THE EFFECT OF BALANCE DAY RECONCILIATION OF OPERATING CASH FLOWS WITH NET PROFIT Add in the reconciliation Decrease in current assets Increase in current liabilities Subtract in the reconciliation Increase in current assets Decrease in current liabilities

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 15 RECONCILIATION OF OPERATING CASH FLOWS WITH NET PROFIT Reconciliation item$$ NET PROFIT Depreciation – Plant & equipment Depreciation – Office equipment4 000 Doubtful debts0 Loss on sale of plant3 000 Decrease in accounts receivable Increase in accounts payable Decrease in inventories Net cash from operating activities Reconciliation of operating cash flows with net profit as at 30 June 2009 Illustration 9D (page 234)

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 16 DIRECT METHOD PREFERRED METHOD  Information will need to be adapted from the accrual system  Accounts will need to be reconstructed to provide this information

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 17 RECONSTRUCT ACCOUNTS RECEIPTS FROM CUSTOMERS  FORMULA: Cash received = sales +/- change in receivables balance – bad debts written off – discount allowed Accounts receivable Opening balance Sales (accrual) Cash received Discount allowed Bad debts Closing balance

 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 18 RECONSTRUCT ACCOUNTS PAYMENTS TO SUPPLIERS InventoryAccounts payable Opening balance Purchases Cost goods sold Closing balance Opening balance Purchases Payments Discounts Closing balance  FORMULA: Cash paid = cost of goods sold +/- changes inventory balance +/- change in payables balance – discount received