1. FINANCIAL ACCOUNTING II BACT 304
CASH FLOW STATEMENT
LECTURERS:
DR. JOHN MACCARTHY
&
MR. LEXIS TETTEH

2. Statement of Cash Flow
The cash flow statements is an essential tool for making economic decision:
It shows the company’s ability to generate cash for running the business.
It shows how the company utilise cash in achieving the objective of the company.
Difference between Cash-flow and Profitability
Cash-flows show cash movements in terms of cash receipts and payments for any economic activities within the company.
Profit is the difference between revenue and expenses paid within a specific period.
A company can be profitable and still be bankrupt because of cash-flows difficulties

3. Statement of Cash Flow (cont.)
Financial Statements:
Statement of Comprehensive Income
Statement of Financial Position
Statement of Cash Flow
How to prepare cash flow statement?
Statement of Cash flow is prepared from the SOCI and SOFP
That is Statement of Cash-flow translates earnings (incomes) from the SOCI and SOFP to finance the operations of the business.

4. Statement of Cash Flow (cont.)
Definition of Cash?
The definition of cash include cash and cash equivalent.
Cash includes notes, coins and bank account balances.
Cash equivalent includes:
Call money
Treasury bills (T-bills).
Short-term certificate of deposit (CDs)
Commercial Paper (CPs)

5. Statement of Cash Flow (cont.)
The importance of liquidity in a business:
It shows the company’s ability to generate cash for running the business.
It shows how the company utilise cash in achieving the objective of the company.
It reveals how much can be generated within and how does the business needed to finance from outside sources.
Assessing the liquidity of a business is a means of determining the financial “health” of a business.
Liquid assets can be converted easily to cash within a short period of time.

6. Statement of Cash Flow (cont.)
Difference between Cash-flow and Profitability
Cash-flow shows cash movements in terms of cash receipts and payments for any economic activities within the company.
Profit is the difference between revenue and expenses paid within a specific period.
A company can be profitable and still be bankrupt because of cash-flows difficulties

7. Statement of Cash Flow (cont.)
Components of Cash-flow statement: Operating activities; investing activities and financing activities.
Cash-flow from operating activities: This shows how the company generates cash through business operations (i.e., selling product or delivery service to customers).
Cash-flow from investing activities: This shows the extent to which the company invests into new assets in order to generate future profits and cash-flows.
Cash-flow from financing activities: This shows how long term capital is provided for financing business activities (i.e., either through equity or debt capital).

8. Statement of Cash Flow (cont.)
Methods for preparing cash-flows: Indirect and direct methods
Indirect method: The net cash-flows from operating activities is arrived at, by starting from company’s operating profit and then adjusting for the non-cash charges and credits.
Direct method: Direct method: The components of operating cash-flows (i.e., cash receipts from customers, payments to suppliers and other cash movements.

9. Preparation of Statement of Cash flows: Indirect method
Cash flows from operating activities:
This is a main point for most stakeholders as an organisation cannot survive in the long-term unless it generates sufficient cash flows from its operating activities.
Depreciation is added back to profit as it is a book entry and cash is not affected.
The increase or decrease in inventory is subtracted or added because cash was paid to increase inventory.
The increase in accounts receivable is subtracted since it reflects sales that have not yet been received.

10. Preparation of Statement of Cash flows: Indirect method
Under this method the net cash flow from operating activities is determined by adjusting Net profit or loss for the effects of the following:
Changes in inventories, accounts receivable (debtors and prepayments), accounts payable (creditors and accruals).
Non-cash items such as depreciation, provision, deferred taxes, unrealised foreign currency gains and losses, undistributed profits of associated and minority interests.

11. Preparation of Statement of Cash flows: Indirect method
All other items for which the cash effects are neither investing nor financing cash flows.
Cash flows from investing activities:
This reflects the cash used to purchase assets that have a long life.
Cash flows from financing activities:
This include amounts received from the owner(s) to increase capital and amounts received (or paid) through long-term borrowing.

12. Preparation of Statement of Cash flows: Indirect method
Name of Entity
Statement of Cash flows for the Year Ended 31st December, 2016
Notes
GHC
Cash-flow from operating activities
Net profit before tax
xxx
(Increase)/Decrease in inventories
(Increase)/Decrease in receivables
(Decrease)/Increase in payable
Dividend received
Tax paid
Net cash flow from operating activities
Cash-flow from investing activities
Purchase of fixed assets for cash
(xxx)
Sales of asset for cash
Net cash from investing activities
Cash from financing activities
Issue of shares
Issue and redemption of debentures
Net cash and cash equivalents
Opening cash and bank balance
Closing cash and bank balance

13. Preparation of Statement of Cash Flow
From the Statement of Comprehensive Income and Statement of Financial Position of Yorke Gari Limited.
Statement of Comprehensive Income for the year ended Dec. 31, 2014
Ghc
Sales
72,000
Cost of sales
(7,000)
Gross profit
65,000
Staff costs
9,400
Depreciation
11,800
Loss on disposal of non- current assets
1,800
23,000
Profit before interest and tax
42,000
Interest payment
(2,800)
Profit before tax
39,200
Taxation
(12,400)
Profit for the period
26,800

14. Preparation of Statement of Cash Flow (cont.)
Statement of Financial Position as at Dec. 31, 2014
2014
2013
Noncurrent assets
Ghc
Plant & machinery
Cost
159,600
156,000
Depreciation
(31,800)
(22,400)
Total noncurrent assets
127,800
133,600
Current assets
Inventory
2,400
2,000
Trade receivables
7,600
5,800
Bank
4,800
5,600
Total current assets
14,800
13,400
Total assets
142,600
147,000
Equity and Liabilities
Equity
Share capital
39,600
36,400
Retained earnings
71,600
51,400
Total equity
111,200
87,800

15. Preparation of Statement of Cash Flow (cont.)
Notes:
During the year, the company paid Ghc9, 000 for a new piece of machinery.
Dividends paid during 2014 totalled Ghc6, 600 and interest paid was Gh2, 800.
Required to prepare a statement of cash-flows for Yorke Gari for the year ended December 31, 2016 in accordance with the requirements indirect method.
Noncurrent liabilities
Debentures
20,000
50,000
Total of noncurrent liabilities
Current liabilities
Trade payables
1,200
600
Taxation
10,200
8,600
Net current assets
11,400
9,200
Total equity and liabilities
142,600
147,000

16. Statement of Comprehensive Income for the y/e Dec. 31, 2016
Practise question 2
Set out below are the financial statements of Waakye Co Limited. You are the financial controller, faced with the task of implementing Statement of the Company.
Waakye Co Limited
Statement of Comprehensive Income for the y/e Dec. 31, 2016
Ghc
Revenue
2553
Cost of sales
(1,814)
Gross profit
739
Distribution costs
(125)
Administrative expenses
(264)
Profit before interest & tax
350
Interest received 25
Interest paid
(75)
Profit before tax
300
Taxation
(140)
Net profit for the period
160

17. Practise question 2
Statement of Financial Position as at Dec. 31, 2016
Assets
Ghc000
Non Current assets
Plant & machinery
380
305
Intangible assets
250
200
Investments - 25
Current assets
Inventories
150
102
Receivables
390
315
Cash in hand 52 1
Total assets
1,222
948

18. Practise question 2
The cash proceeds of the sale of asset investments amounted to Ghc30,000.
Plant & machinery at cost was Ghc85, 000 and net book value was Ghc 45,000 were sold for Ghc32, 000 during the year.
Liabilities and equity
Equity
share capital
360
300
Revaluation reserve
100 91
Retained earnings
260
180
Non- current liabilities
Loan
170 50
Current liabilities
Trade payables
127
119
Bank overdraft 85 98
Taxation
120
110
1,222
948

19. Practise question 2
60,000 Ghc1 ordinary shares were issued during the year.
The following information relates to plant and machinery:
Ghc Ghc
Cost
Acc. Dep
Carrying value
You are required to:
Prepare a statement of cash flows for the year to December 31, 2016.