Chapter 7 Cash Flow Statements

Overview The Corporations Act requires that public companies publish a Cash Flow Statement. The requirements of the Cash Flow Statement are set down in detail by AASB 107, Cash Flow Statements.

Corporations Act 2001 Provisions Relating to Financial Statements 7.1 Corporations Act 2001 Provisions Relating to Financial Statements

Corporations Act S292 Section 292 provides that a reporting entity must prepare general purpose financial reports.

Corporations Act S296 and S297 Section 296 states that financial reports must be prepared according to the AASB Standards. Section 297 requires that reports must be fair and true assessments.

AASB 107 Cash Flow Statements AASB107, Cash Flow Statements requires a Cash Flow Statement to be disclosed in general purpose financial reports.

Cash Flow Statement Defined A summary statement of all receipts and payments of cash by a business for a reporting period.

Cash Flow Statement Defined - Continued The Statement is divided into functional groupings of: It also identifies the cash funds position of the business at the end of the reporting period. Operating Activities Investing Activities Financing Activities

Need for Cash Flow Statements A Cash Flow Statement provides readers of the financial reports with a summary of a change in cash funds from beginning to end of the period.

What are Cash Funds? Cash Funds consist of cash and cash equivalents. Cash consists of : that are used in the day-to-day cash transactions of the business. Cash on hand Cash in bank accounts Petty Cash

Money-market deposits Cash Equivalents Cash Equivalents are investments that are readily convertible to cash at the investor's option. These will include : Transfers between cash and cash equivalents do not need to be reported. At-call deposits Bank overdraft Money-market deposits Bank bills

Profits v Cash The making of profits by a business does not necessarily translate into an increase in cash funds at the end of the reporting period. For example: Depreciation, accrued revenues and accrued expenses are non-cash but included in profit calculation.

Format of a Cash Flow Statement 7.2 Format of a Cash Flow Statement

Format of a Cash Flow Statement

Format of a Cash Flow Statement Continued

Elements of a Cash Flow Statement 7.3 Elements of a Cash Flow Statement

Elements of a Cash Flow Statement Information is presented under: Operating activities Investing activities Financing activities

Operating Activities Operating activities are those cash items which are reflected in the profit or loss for the reporting period. i.e. cash transactions associated with: The provision of goods or services. Payments to employees. Payments of interest and income tax. Receipts of cash dividends and interest.

Operating Activities Cash will be received from customers directly by a cash sale or from accounts receivable. Payments will be made to the suppliers of goods and other payables.

Operating Activities The cash amounts will be determined by: items in the Income Statement and current assets and current liabilities in the balance sheet.

Investing Activities Investing activities relate to the acquisition or disposal of non-current assets such as the cash purchase or cash sale of property, plant and equipment.

Financing Activities Proceeds from borrowings Issue of share capital Financing activities are those cash items affecting shareholders equity and external borrowings. Examples: Issue of share capital Proceeds from borrowings Repayment of borrowings Dividends paid

Financing Activities Cash inflows and outflows from Operating, Investing and Financing activities, determine the net increase/decrease in cash funds for the period. This is then added to the beginning balance of cash funds to provide the ending balance.

Preparation of Cash Flow Statements 7.4 Preparation of Cash Flow Statements

Preparation of Cash Flow Statements Using a cash transaction summary is the most direct method of preparing a cash flow statement. Classify transactions into operating, investing or financing activities

Preparation of Cash Flow Statements from Cash Book Summaries The cash book summary is another direct method of preparing a cash flow as it simply requires classification of cash transactions.

Net Cash Flow from Operating Activities 7.5 Reconciliation of the Net Cash Flow from Operating Activities with the Net Profit for the Period

Reconciliation of the Net Cash Flow from Operating Activities with the Net Profit for the Period Operating activities are those cash items reflected in the profit or loss for the period. AASB 107 requires that a reconciliation of cash flows from operating activities to operating profit/loss be disclosed in the financial reports.

Purpose of the Reconciliation Explains why the operating profit for the business does not equate to a corresponding increase in cash funds.

Format of the Reconciliation Statement

Other Non-cash Items Other non-cash items, such as Bad Debts, Discounts Allowed and Discounts Received are not included under the “Non-Cash Items” heading. These items are indirectly included.