Cash in the Annual Accounts The Cash Flow Statement

The Cash Flow Statement Recall Two major financial statements covered last semester Profit and Loss Account Balance Sheet There is a third The Cash Flow Statement

Cash Flow Statement Richard O’Callaghan

Why a Cash Flow Statement? Remember, profit and cash are not the same thing Profit measures activity Cash-flow measures….. Cash Because profit by itself does not provide the full picture, a “full” set of accounts includes a Cash Flow Statement The Cash Flow statement is a statement of cash in and cash out for the year and provides the net cash position (i.e. it answers the question “how much money do we have?”)

Cash Flow Statement Record of cash received and cash paid out Transactions that do not result in the flow of cash (e.g. depreciation/provisions) It does not matter whether the cash is used for capital items or operational expenses - if it involves cash then it appears in the Cash Flow Statement

Content of a Cash Flow Statement Richard O’Callaghan

There are only three major headings in a Cash Flow Statement Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activity The Cash Flow Statement also: reconciles the net profit with the cash position provides the change in cash during the year includes final / closing cash position at year end (should match the bank and cash figure in the Balance Sheet)

Cash Flow from Operating Activities This is the cash in and/or out from the “normal” business activities of the firm While it is possible to measure cash flow directly (see across) this is not how things are normally done The usual starting point is the companies Profit Cash Flow Statement Direct Method € 31.12.2017 Collections from trade and other Debtors X Payments to suppliers (X) Payments to employees (X) Payments for Corporation Tax (X) Payments related to retirement benefits (X) . Cash Flow From Operating Activities X / (X)

Indirect Method Unfortunately, net cash from operating activities is not usually presented using the Direct Method It is actually derived by first adjusting the companies profit figure for non-cash items and cash transactions that belong elsewhere in the Cash Flow Statement Non-Cash Items are accounting transactions that do not require the movement of cash. Examples: Depreciation Changes in Debtors or Creditors Provisions for bad debt and any other similar provisions These are removed from the profit figure to get to a cash figure

Cash Flow from Operating Activities Profit for the Financial Year X Adjustments Depreciation X - added back as it reduces profit Amortisation X - added back as it reduces profit Profit on disposals (X) - subtracted as it increases profit Interest paid X - added back as it appears elsewhere Interest received (X) - subtracted as it appears elsewhere Taxation X - added back as it appears elsewhere Decrease / (Increase) in Debtors (X) - or X - (X) for increase Decrease / (Increase) in Stock X - or (X) - X for decrease Increase / (Decrease) in Creditors X - or (X) - (X) for decrease Cash from Operations X

Cash Flow from Operating Activities Once the adjustments we have a figure called “Cash from Operations” This figure has two transactions applied against it to come up with the “Net Cash from Operating Activities” figure …. Increase / (Decrease) in Creditors X Cash from Operations X Interest paid (X) Income Taxes paid (X) Net Cash Generated from Operating Activities X

Cash Flows from Investing Activities This is the cash used to purchase Fixed Assets and the money received from any form of investment …. Net Cash Generated from Operating Activities X Proceeds from the sale of equipment X Purchases of property, plant and equipment (X) Purchases of intangible assets (X) Interest received X Net cash from Investing Activities X

Cash Flows from Financing Activities Represents the cash flows from the means that the company has used to finance itself …. Net cash from Investing Activities X Issue of Ordinary Share Capital X Repayment of Borrowings (X) Dividends Paid (X) Net Cash Used in Financing Activities (X)

Final Cash Position The cash flow from Operating Activities, Investing Activities and Financing Activities represents the full cash flows for the year Therefore, all that is left to consider is the net cash position for the year and the cash balance at the endo of the year …. Net increase/(decrease) in cash and cash equivalents X Cash and cash equivalents at the beginning of the year X Cash and Cash equivalents at the end of the year X