Prepared by Nadeem Salam Cash Flow Statement Prepared by Nadeem Salam

Introduction IAS 7, Cash Flow Statements, requires that a cash flow statement is included as part of a company’s financial statements. It complements the income statement and balance sheet as follows:   the income statement reports on the financial performance of the company the balance sheet reports on the financial position of the company the cash flow statement focuses on cash inflows and cash outflows, and reports on changes in the financial position of the company

Introduction These three financial statements together provide users of published accounts with much of the information they need to understand the financial performance of the company.   A cash flow statement uses information from the accounting records (including income statement and balance sheet) to show an overall view of money flowing in and out of a business during an accounting period. Such a statement explains to the shareholders why, after a year of good profits for example, there is a reduced balance at the bank or a larger bank overdraft at the year end than there was at the beginning of the year. The cash flow statement concentrates on the liquidity of the business: it is often a lack of cash (a lack of liquidity) that causes most businesses to fail. Cash is often described as the ‘life blood’ of a business.

Cash Flow Statement Why profit and cash are not same? Profit Cash   Why profit and cash are not same?   Because of timing profit and cash move differently. Profit Profit is periodic measure, Profit can be thought of an imaginary number created by Accountant. Profit creates only numerical growth. Cash Cash precisely measurable, tangible and absolute thing.

CONTENTS OF A CASH FLOW STATEMENT Operating activities Profit from operations (profit, before deduction of tax and interest) Depreciation charge for the year and, treatment of a gain or a loss on sale of non- current assets Changes in inventories, trade receivables and trade payables Less interest paid Less taxes paid on income (corporation tax) Investing activities Inflows: sale proceeds from property, plant and equipment, intangibles, and other long-term (non-current) assets Outflows: purchase cost of property, plant and equipment, intangibles, and other long-term (non-current) assets Interest received Dividends received Financing activities Inflows: receipts from increase in share capital (note: no cash inflow from a bonus issue of shares), raising/increase of loans Outflows: repayment of share capital and loans Dividends paid

Company Name Cash Flow Statement $ Operating Profit xx Add: Depreciation x Add: Loss on disposal x Less: Gain on disposal (x) Less: increase in inventory / Receivable/ prepayment (x) Add: decrease in inventory / Receivable/ prepayments x Less: decrease in payables / owing (x) Add: increase in payables / owing x Add: Amortization of goodwill x Add: Bad debts x Less: Interest paid (x) Less: Tax paid (x) Net cash inflow/outflow from operation xx

Purchase of Non-current Assets (x) Sale of Non-current Assets x $ $ Investing Activities Purchase of Non-current Assets (x) Sale of Non-current Assets x Dividend Received x Interest Received x Net cash flow from investing activities xx Net cash inflow/ outflow from financing xx Financing Activities Issue of shares with Premium x Issue of debentures / Loan x Redemption of Shares & debenture (x) Dividend Paid (x) xx Net inc / dec in cash and cash Equivalent XX Add: opening cash and cash Equivalent xx Closing balance of cash and cash equivalent xx

Non – Current Assets Non – Current Assets (Cost) Balance b/d xxx Disposal (cost) xxx Revaluation xxx Addition xxx Balance c/d xxx ___ xxx xxx Disposal A/C Non – current Assets xxx Bank xxx Provision for depreciation xxx Gain xxx Loss xxx xxx xxx

Provision for Depreciation Disposal xxx Balance b/d xxx Profit and Loss xxx Balance c/d xxx xxx xxx Non – current Assets (Bookvalue) Balance b/d xxx Disposal (B.V) xxx Revaluation xxx Depreciation charge xxx Addition xxx Balance c/d xxx ___ xxx xxx

Statement of Retained Profit If operating profit is not given in the question than we will prepare statement of Retained profit Statement of Retained Profit Interest X Balance b/d XX Tax X Transfer to General Reserve X Operating profit X Dividend paid X Capital Redemption Reserve X Balance c/d X XX XX

Example: 2013 2014 Retained Profit 15 000 20 000 Share Premium 8 000 9 000 General Reserve 3 000 4 000 Capital Redemption Reserve ------ 2 000 Note Interest expense for the Period $5000 Tax expense for the year $3000 Dividend paid for the year $6000 Required: Calculate operating profit for inclusion in Cash Flow Statement. Statement of Retained Profit Interest 5000 b/d 15 000 Tax 3000 Transfer to General Reserve 1000 Dividend paid 6000 CRR 2000 Operating Profit 22 000 c/d 20 000 37 000 37 000

DEALING WITH DIVIENDS IN THE FINANCIAL STATEMENTS Dividends are distributions to the shareholders, who own the company, as a return on their investment. Many companies pay dividends twice a year – an interim dividend, which is usually paid just over halfway through the financial year, and a final dividend which is paid early in the next financial year. The interim dividend is based on the profits reported by the company during the first half of the year, while the final dividend is based on the profits reported for the full year. The final dividend is proposed by the directors but has to be approved by shareholders at the Annual General Meeting (AGM) of the company. Thus the financial calendar for a company with a financial year end of 31 December 2009 might take the following form:

Jan March April August Jan   2009 2010 Jan March April August Jan directors propose final dividend for 2008 directors propose final dividend for 2009 final dividend paid for 2008 interim dividend paid for 2009 based on reported profit for first half of year AGM of the company approves final dividend for 2008

Only the dividends paid during the year can be recorded in the financial statements. In the above example, the dividends paid in April 2009 (final dividend for the previous year) and August 2009 (interim dividend for the current year) are recorded in the financial statements for the year ended 31 December 2009. The proposed final dividend for the year ended 31 December 2009 is disclosed as a note to the accounts, stating that it is subject to approval by the shareholders at the company’s Annual General Meeting.

Investment Ratios

Example Student Student A B 45 90 50 200

Company Company A B Profit 10,000 Profit 10,000 Invested Capital 50 000 100,000 Return on Investment 20% 10%

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