Cashflow

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Statement of Cash Flows

Introduction
As we know, annual financial reports are comprised of:

1.
2.
3.
4.
A balance sheet
An income statement
A changes in owners equity report
And a cash flow statement
The cash flow statement is relatively new compared to the balance sheet,
income statement and changes in owners equity report. The international
account standards board issued international accounting standard 7 (ISA 7),
which became effective from 1994, which required all reporting entities to
issue a cash flow statement within their general purpose financial reports.
Objectives
Understanding the purpose of a cash flow statement
Being able to classify accounts into operating, investing and financing
activities
Prepare a statement of cash flows under the direct method
Prepare a statement of cash flows under the indirect method
Understanding the limitations of a cash flow statement
The Purpose of Cash Flow Statements

A statement of cash flow is used in conjunction with other financial,
reports, like the balance sheet and income statement. The statement of
cash flow provides a clear insight into how a business entity utilises their
cash.
It provides a summary of the cash inflows and outflows from dayto-day operations.
How quickly debtors pay their account, that is, how quickly
accounts receivable turn into cash.
The business entities ability to meet current liabilities like

purchases on credit and short term loans.
The business entities ability to buy or sell non-current assets like

new equipment and new investments.
How the business entity utilises their capital and debt borrowings.
Usually business entities perform transactions on credit, like the purchase

and sale of stock. Accrual basis accounting states that revenue is
recorded in the period in which it is earned, not the period in which it is
received. Expenses are recorded in the period in which they occur, not in
the period in which they have been paid.
When making a cash flow statement we are interested in the cash inflows
and outflows that have occurred during a particular period, so accrual
basis accounting isnt much help, as cash may enter the business 3
months after revenue has been earned and cash may exit the business 3
months after an expense has occurred.
Say that stock is sold in May on credit and so cash may not be received
until June. Under accrual basis accounting, the revenue is recorded in
May and this is the period in which the revenue was earned.
Electricity and gas expense occur during the month of May. However, the
electricity and gas expense account may not be payable until June.
Under accrual accounting the expense is recorded in May, as this is the
period in which the expense occurred.
Our goal when making a cash flow statement is converting these accrual
basis transactions into cash basis. Cash basis accounting is recording the
revenue in the period in which it is received and expenses in the period in
which they have been paid. Thus if revenue is earned in May, but the
cash is not received until June, then under cash basis accounting, the
revenue would be recorded in June.
2012 http://www.weallstartsomewhere.com
Cash and Cash Equivalents

Cash and cash equivalents are simply any cash that a business can get
their hands on quickly. Cash at bank, an entity can obtain quiet easily by
walking to the nearest bank and withdrawing the funds. Account
receivables are usually converted into cash within 90 days. Short term
investments like term deposits that are readily accessible or any other
type of short term investments, like commercial bills or promissory notes.
More to the point, cash equivalents are anything that can be converted
into cash within 30 to 90 days.
Cash Flow Statement Classifications

A cash flow statement is comprised of three main categories.
1. Cash flows from operating activities
2. Cash flows from investing activities
3. Cash flows from financing activities
Cash flows from operating activities
When we say operating activities what exactly do we mean? Operating
activities refer to the cash inflows and the cash outflows that occur in the
day-to-day operation of a business. Most items will come directly from
the income statement and the balance sheet so it is always important to
have these two statements on hand. However not every item on the
income statement will be required. Take depreciation expense for
example. Depreciation expense does not see any movement in cash
(otherwise known as a non-cash transaction), so it is not found in the
cash flow statement. Items that are found in operating activities will
come from the change in current assets and current liabilities during
the period. This is determined by comparing the current periods balance
sheet with the previous periods balance sheet.
Cash inflows mainly consist of revenue, decreases in current assets and
increases in current liabilities. When an entity sells goods or performs a
service they receive cash. This is therefore reported under cash flows
from operating activities.
Cash outflows mainly consist of expenses that have incurred in order to
operate the business from day-to-day, increases in current assets and
decreases in current liabilities. Cash outflows can be anything from cash
paid to suppliers for the purchase of goods, salaries and wages expense,
income tax, borrowing costs and interest paid to lenders
When trying to determine if a transaction comes under the heading cash
flows from operating activities ask, does it appear in that current assets
or current liabilities section of the balance sheet? If yes then it comes
under cash flows from operating activities.
Cash receipts from customers (inflow)
Cash paid to suppliers and employees (outflow)
Cash generated from operations
Interest received (inflow)
Interest paid (outflow)
Income tax paid (outflow)
Net cash from operating activities
$ xxx
$(xxx)
$ xxx
$ xxx
$(xxx)
$(xxx)
$xxx
Cash flows from investing activities

Cash flows from investing activities refer to what a business entity uses
their revenue for. Changes in non-current assets during the accounting
period (determined by using the balance sheet) are reported in the cash
flows from investing activities section of the cash flow statement.
Cash inflows consist of items like the sale of non-current assets and the
sale of shares, debentures and intangible assets. When an entity sells
non-current assets or shares they are receiving cash for items that were
once considered an investment.
Cash outflows consist of the purchase of non-current assets. When an
entity purchases a non-current asset it is considered an investment as its
meant to provide a business entity with future economic benefits. The
purchase of shares and debentures is therefore considered an investment
because when an entity loans cash to another entity they are expected to
receive the amount they loaned (the principle) plus any future interest or
dividends. It should be noted that we have interest received in the
operating activities section of the cash flow statement. Depending on
what you prefer, it can be recorded in the investing activities section also.
Purchase of planet, property and equipment (outflow)
Purchase of investments (outflow)
Cash from sale of non-current assets (inflow)
Dividends received (inflow)
Net cash used in investing activities
$(xxx)
$(xxx)
$ xxx
$ xxx
$xxx
Cash flows from financing activities

Financing activities refers to how a business entity finances their day-today business operations. Changes in non-current liabilities and
owners equity during the period (determined by using the balance
sheet) are reported in the cash flows from financing activities section of
the cash flow statement.
Cash inflows consist of the issuing of shares and debentures. When an
investor purchases shares or debentures from a business entity they are
lending the entity money with the promise of cash flows in the future.
Another form of cash inflows from financing activities consist of bank
loans however the repayment of a bank loan is an outflow.
Cash outflows consist of the repayment of loans to borrowers, the
retirement of shares (a company purchasing shares back from investors)
and the payment of dividends to investors.
Cash from the issue of common stock (inflow)
Cash from long term borrowings (inflow)
Repayment of borrowings (outflow)
Payment of dividends (outflow)
Net cash used in financing activities
$xxx
$xxx
$ (xxx)
$ (xxx)
$xxx
The Relationship between the Cash Flow

Statement and the Balance Sheet
A change in current assets and
Current Assets
2012
Cash at bank
$xxx
Accounts receivable
$xxx
Inventory
$xxx
Prepaid insurance
$xxx
liabilities (excluding cash at bank)

2011
change
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
Current liabilities
Salaries payable
Accounts payable
Interest payable
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
is reported under cash flows from operating activities.

Cash receipts from customers
$ xxx
Cash paid to suppliers and employees
$(xxx)
$ xxx
Interest paid
$(xxx)
Income tax paid
$(xxx)
$xxx
A change in non-current assets
Non- Current
Assets
Land
Buildings
Investments
Vehicles
2012
2011
change
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
is reported under cash flows from financing activities.

Purchase PP&E
Purchase of investments
Sale of non-current assets
Dividends received
$(xxx)
$(xxx)
$ xxx
$ xxx
$xxx
A change in non-current liabilities and owners equity

Non-current
liabilities
Loan payable
2012
2011
change
$xxx
$xxx
$xxx
Owners Equity
Contributed capital
Retained earning
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
$xxx
is reported under cash flows from financing activities.
Cash from issue of common stock
Cash from long term borrowings
Repayment of borrowings
Payment of dividends
$(xxx)
$(xxx)
$ xxx
$ xxx
$xxx
The change in cash

Cash flow of assets
Say that an entity purchases a computer. Their assets have increased
but their cash has decreased
Now say that they sold the old computer they originally had. Their
assets have decreased but their cash has increased due to the cash
received from the sale of the computer.
What if an entity sells an asset on credit? Account receivables increase
but no cash has been received so we say that cash has been decreased.
Cash flow of liabilities
The entity purchased the computer on credit so no cash exchanged
hands. Liabilities increase because the entity is liable to pay for the
computer at some point in the future. What has happened to their cash?
The entity has reserved cash by delaying payment so we say that cash
has increased.
The entity pays their account owing for the computer. By doing so they
have decreased their liabilities. As a result of decreasing their liability
they have used cash, so cash has decreased.
Cash flow of equity
The entity issues $100,000 worth of ordinary shares. Owners equity
has increased. Investors lend the entity cash and so the entities cash
has therefore increased.
The entity may choose to retire or buy back their ordinary shares. This
decreases owners equity and decreases their cash.
Summary
Lets try to summaries what weve learnt so far.
A change in assets will see a change in cash in the opposite direction.
Assets increase cash decreases
Assets decrease cash increases
A change in liabilities and owners equity will see a change in cash in the
same direction.
Liabilities and Owners Equity increase cash increases
Liabilities and Owners Equity decrease cash decreases
Creating a Cash Flow Statement

Example 1
The following transactions were undertaken by Hayden Ltd during the financial
year ended 30 June 2012.
Begin by
determining
which items
are classified
as financing
activities,
investing
activities and
operating
activities.
Make a side
note next to
each item.
F
O
I
I
F+O
O
O
F
O
O
I
I
1. Issued ordinary shares for cash $500,000

2.
3.
4.
5.
6.
7.
8.
Cash received from customers $150,000

Purchased land $100,000
Received cash from the sale of machinery $90,000
Paid bank mortgage $120,000 plus $14,000 interest
Paid cash to suppliers for the purchase of inventory $45,000
Insurance paid $1,000
Paid dividends to investors $30,000
9. Paid wages and salaries expense $21,000

10. Paid income taxes $12,000
11. Purchased ordinary shares $20,000 from Texas Ltd.
12. Cash received from interest $900
13. Cash balance as at 30 June 2011 $25,000
Hayden Ltd.
For the year ended 30 June 2012

Cash receipts from customers 2 (inflow)
Cash paid to suppliers 6 + 7 (outflow)
Cash paid to employees 9 (outflow)
Interest received 12 (inflow)
Interest paid 5 (outflow)
Tax paid 10 (outflow)
Net cash provided by operating activities
Purchase of planet, property and equipment 3 (outflow)
Purchase of investments 11 (outflow)

Cash from sale of non-current assets 4 (inflow)

Cash from the issue of common stock 1 (inflow)
Repayment of borrowings 5 (outflow)
Payment of dividends 8 (outflow)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period 13
Cash and cash equivalents at end of period
150,000
(46,000)
(21,000)
83,000
900
(14,000)
(12,000)
$57,900
($100,000)
(20,000)
90,000
$(30,000)
500,000
(120,000)
(30,000)
$350,000
$377,900
$25,000
$352,900

Hayden Ltd.
Income Statement
Sales revenue
Cost of goods sold
Gross profit
Other Revenue
Interest revenue
Gain on assets
450,000
170,000
280,000
Expenses
Advertising expense
Insurance expense
Wages and salaries expenses
Interest expense
Depreciation expense - machinery
4,000
1,000
5,000
9,000
24,000
56,000
2,000
19,000
110,000
Net income before tax

Less: Income tax
Net Income
175,000
54,600
120,400
Hayden Ltd.
Statement of financial position
As at 30 June 2012
Current Assets
Cash at bank
Accounts receivable
Inventory
Prepaid insurance
Interest receivable
Non-Current Assets
Investments
Plant, property and equipment
Accumulated depreciation machinery
TOTAL ASSETS
Liabilities
Accounts payable
Wages and salaries payable
Advertising expense payable
Equity
Hayden Ltd Capital
TOTAL LAIBILITIES AND EQUITY
30 June
2012
35,000
27,000
40,000
500
600
30 June
2011
30,000
20,000
44,000
800
400
Change
20,000
200,000
(15,000)
10,000
150,000
(10,000)
10,000
50,000
(5,000)
308,100
245,200
62,900
34,000
12,000
100
32,000
8,000
400
2,000
4,000
(300)
262,000
308,100
204,800
245,200
57,200
62,900
5,000
7,000
(4,000)
(300)
200
Hayden Ltd
Statement of Changes in Equity
Balance at June 30 2011
Net income
Less: Drawings
Balance at June 30 2012
204,800
120,400
(63,200)
262,000
Creating a Cash Flow Statement Direct

Method - Example 2
As stated early, the idea of a cash flow statement is to see how much
cash is generated during the period. In order to determine net cash from
operating activities under the direct method, it is necessary to convert
items used in determining profit under the accrual basis to a cash basis.
To do this we will be using the financial statements shown on the previous
page.
1. Calculating cash receipts from customers
Cash receipts from customers is an inflow of cash. When goods are sold
on credit account receivables and revenue increase under accrual basis.
However with cash basis accounting revenue is not recognised until cash
has been received. So effectively we do not want to include an entities
account receivables in the cash flow statement. What we want to
determined is how much of those credit sales (account receivables) have
been received during the period.
Earlier we stated that an increase in assets results in a decrease in
cash and a decrease in assets results in an increase in cash.
An easy way of determining cash receipts from customers is by asking,
when account receivables increase what happens to cash? When
account receivables increase, cash decreases.
Sales revenue is $450,000
Account receivables have increased during the period by $7,000 which
effectively decreases cash by $7,000.
Cash receipts from customers equal:
+450,000
increase/inflow
-$7,000
Decrease in cash
= $443,000
increase/inflow
10
2. Calculating cash paid to suppliers and employees

Cash paid to suppliers and employees is an outflow of cash. When
goods are purchased on credit an entity is deferring payment and thus
increasing the amount of cash they have. Under the accrual basis of
accounting, purchases of inventory on credit is recognised when the
goods are received and not when the goods are paid for. This results in
both an increase in inventory and an increase in accounts payable. Under
the cash basis of accounting the purchase of inventory is not recognised
until cash has been paid. So effectively we do not want to include any
purchases of goods or services that an entity has not outlaid any cash for
in our cash flow statement.
Calculating cash paid to suppliers
When determining cash paid to suppliers we need to take a look at cost
of goods sold found on the income statement, and inventory and
account payables found on the balance sheet.
Liabilities and increase cash increases
Liabilities and decrease cash decreases
From the balance sheet we can see that inventory has decreased by
$4,000 during the period. A decrease in assets results in an increase in
cash of $4,000.
During the period account payables increased by $2,000. An increase in
account payables results in an increase in cash of $2,000.
Cost of goods sold is a decrease in cash or a cash outflow. -$170,000
Cash paid to suppliers is:
-$170,000
decrease/outflow
+$4,000
increase in cash
+$2,000
increase in cash
= -$164,000
decrease/outflow
11
Calculating cash paid to employees

Another cash outflow that comes under this category is the outflow of
cash paid to employees. Wages and salaries paid during the period are
found on the income statement under expenses. The amount still owing
to employees (wages and salaries payable) can be found on the balance
sheet under current liabilities. Determining the amount of cash paid to
employees during the period is as follows:
Wages and salaries expense represent a cash outflow. A cash outflow
results in a decrease in cash. -$56,000
Wages and salaries payable have increased by $4,000 during the period.
An increase is liabilities results in an increase in cash.
Cash paid to employees is:
-$56,000
decrease/outflow
-$4,000
decrease in cash
= -$52,000
decrease/outflow
Calculating cash paid for advertising

The income statement also shows advertising expense for the period of
$9,000. The balance sheet shows that the advertising expense has
decreased by $300 during the period.
The $300 decrease in advertising expense payable during the period
represents a decrease in cash.
Therefore cash paid for advertising is:
-$9,000
decrease/outflow
-$3,000
decrease in cash
= -$9,300
decrease/outflow
Calculating cash paid for prepaid expenses

A different type of expense is a prepaid expense. Take insurance expense
for example. For the period insurance expense amounted to $24,000.
On our balance sheet under current assets prepaid insurance has
decreased by $300 ($500 - $800)
Insurance expense represents a decrease in cash. -$24,000
A decrease in assets (prepaid insurance) is an increase in cash.
+$3,000
-$24,000
decrease/outflow
+$300
increase in cash
= -$23,700
decrease/outflow
12
Now we can calculate the total cash outflow to suppliers and employees
Cash paid to suppliers for purchases
Cash paid to employees
Cash paid for advertising
Cash paid for Insurance
Total cash outlay to suppliers and employees (outflow)
$164,000
$52,000
$9,300
$23,7000
$249,000
3. Calculating interest revenue and interest expense

Its important to note that interest revenue can come under either cash
from operating activities or cash from investing activities. Interest
revenue is earned as a result of day-to-day operations and so hence the
reason for classifying it under cash flows from operating activities.
However, interest revenue is earned as a result of making investments
and hence the reason for classifying interest revenue under cash flows
from investing activities. Since interest expense is classified as cash from
operating activities we will classify interest revenue the same way. Just
beware that it can come under either heading.
Calculating interest revenue
Revenue earned for the period is calculated the same way as cash
receipts from customers. The income statement shows $4,000 of interest
revenue earned during the period. The balance sheet shows that there
was an increase in interest receivable of $200 for the period.
Interest revenue is an increase in cash. +$4,000
Interest receivables have increased by $200. An increase in assets
results in a decrease in cash. -$200
+4,000
increase/inflow
-$200
decrease in cash
= $3,800
increase/inflow
Calculating interest expense

Interest expense for the period amounted to $2,000. If there was
interest payable under current liabilities on the balance sheet then the
cash outflow of interest expense would be calculated the same way as
other expenses. Since there is no interest payable on the balance sheet
the cash outflow of interest for the period simply equals $2,000 taken
directly from the income statement.
13
Calculating cash flows from operating activities

We have now calculated everything that makes up the cash flows from
operating activities section of the cash flow statement.
Cash paid to suppliers (outflow)
Cash paid to employees (outflow)
Tax paid
443,000
(197,000)
(52,000)
3,800
(2,000)
(54,600)
$141,200

Cash flows from investing activities mainly consist of the purchase and
sale of non-current assets like plant property and equipment and long
term investments.
The acquisition and disposal of non-current assets
The acquisition or purchase of a non-current asset is a cash outflow as
cash is being paid out to acquire a new asset. The disposal or sale of a
non-current asset is a cash inflow as cash is being received in return for
the asset.
On the balance sheet plant, property and equipment has increased by
$50,000 during the period. An increase in assets is a decrease in cash.
-$50,000
Depreciation is an expense, which can be found on the income statement.
An increase in expenses is a decrease in cash. -$19,000
The effect that the accumulated depreciation has on cash is difficult to
explain because it is a contra asset account. The accumulated
depreciation account has technically increased from $10,000 to $15,000
which you would expect. An increase in accumulated depreciation
results in an increase in cash. (This contradicts what we said earlier
when we explained that an increase in an asset account results in a
decrease in cash. This rule however, does not apply to contra asset
accounts. A change in a contra asset account will affect cash in the same
direction.)
Cash outlaid for plant, property and equipment during the period is:
-$50,000
decrease/outflow
-$19,000
decrease in cash
+$5,000
increase in cash
= -$64,000
decrease/outflow
14
Calculating the gain/loss on the disposal of assets

If plant, property and equipment is sold during the period then the gain
or loss will appear on the income statement. In our example there was a
$1,000 gain on the disposal of an asset which is shown on the income
statement.
Calculating cash outlaid on investments
The last item we need to determine is the amount spent on investments.
The change in investments on the balance sheet indicates that there was
an increase in investments during the period. An increase in assets by
$10,000 results in a decrease in cash by $10,000.
Now that we have all the information that makes up the cash flows from
investing activities section we can produce the second part of our cash
flows statement.
Purchase of planet, property and equipment (outflow)
proceeds from sale of non-current assets (inflow)
$(64,000)
$(10,000)
$ 1,000
$(73,000)

Cash flows from financing activities consist of the inflow of additional
capital by equity owners or through the sale of financial instruments, such
as ordinary shares. Outflows of cash will occur from dividends being
paid to shareholders and drawings of capital from business
owners/partners.
In our example we have no inflow of cash from long term investments.
We have a change in equity so we need to determine the drawings for the
period.
We can use the formula below:
If owners equity increases cash increases

If owners equity decreases cash decreases
The balance sheet shows that owners equity has increased. An increase
in owners equity results in an increase in cash.
We always represent net profit as a negative figure.
-$120,400
+$57,200
increase in cash
= -$63,200
decrease/outflow
15
The cash flows from financing activities section of our cash flow statement
will look like this:
Drawings from owners (outflow)
$0
$0
$ (0)
$ (0)
$(63,200)
$(63,200)
The last step is adding cash flows from the current period to the cash
and cash equivalents from the beginning of the period.

Cash and cash equivalents at beginning of period
$5,000
$30,000
$35,000
The net increase (decrease) in cash and cash equivalents will equal
the difference between the opening cash at bank balance and the
closing cash at bank balance on the balance sheet. So you can
always check that you have the correct answer.
Balance Sheet extract
Current Assets
Cash at bank
Accounts receivable
Inventory
30 June
2012
35,000
27,000
40,000
30 June
20011
30,000
20,000
44,000
Change
5,000
7,000
(4,000)
16
Completed statement of cash flow

Hayden Ltd.
Notes
Cash paid to suppliers (outflow)
Cash paid to employees (outflow)
Tax paid (outflow)
443,000
(197,000)
(52,000)
3,800
(2,000)
(54,600)
9
$141,200

Purchase of plant, property and equipment (outflow)
proceeds from sale of non-current assets (inflow)
$(64,000)
$(10,000)
$ 1,000

Drawings from owners (outflow)
$0
$0
$ (0)
$ (0)
$(63,200)

Cash and cash equivalents at beginning of period
6
$(73,000)
$(63,200)
$5,000
$30,000
$35,000
17
Creating a Cash Flow Statement

Indirect Method - Example 3
There is an alternative way of creating a cash flow statement. It is
referred to as the indirect method. The only part of the cash flow
statement that differs between the direct and indirect method is the cash
flows from operating activities.
Using the direct method we start with receipts from customers, subtract
cash paid to suppliers and employees until we arrive at cash generated
from operation. However, using the indirect we start with profit before
tax until we arrive at cash generated from operations.
Using the same set of financial statements as we used in the previous
example we will demonstrate how to do so.
1. Start with profit before tax from the income statement. +$175,000
2. Add back all non-cash expense items that appear on the income
statement, e.g. depreciation expense. +$19,000
3. Subtract interest expense (interest expense or interest paid will be
added back at the end. It is preferred that interest paid is shown
separately after cash generated from operations is determined).
-$4,000
4. Subtract all cash inflow items that appear under investing and
financing activities. Gain on asset -$1,000
5. Add back all cash outflows that appear under investing and financing
activities. $0
6. Subtract increases in current assets or add decreases in current
assets. Go through all the current assets on the balance sheet one by
one excluding cash.
Account receivables have increased by $7,000. This results in a
decrease in cash so we subtract it from our cash profit.
Inventory has decreased by $4,000. This results in an increase in
cash so we add it to our cash profit.
Prepaid insurance decreased by $300. This results in an increase in
cash so we add it to our cash profit.
Interest receivable has increased by $200. This results in a decrease
in cash so we subtract it from our cash profit.
18
7. Subtract any decreases in current liabilities or add any increases in

current liabilities. Go through all the current liabilities on the balance
sheet one by one.
Account payables have increased during the period by $2,000. An
increase in liabilities results in an increase in cash so we add $2,000
to our profit.
Wages and salaries payable have increased by $4,000. This results
in an increase in cash by $4,000 which we add to our profit.
Advertising expense has decreased during the period by $300. This
results in a decrease in cash so we subtract this from net profit.
8. Calculate cash generated from operations.
9. Subtract interest and tax paid. $2,000 and $54,600 respectively
10.Calculate net cash from operating activities.
Noticed anything? We are still using the rules we emphasised earlier.
A change in assets will see a change in cash in the opposite direction.
A change in liabilities and owners equity will see a change in cash in the
same direction.
Liabilities and Owners Equity increase cash increases
Liabilities and Owners Equity decrease cash decreases
19
Hayden Ltd.
Cash from operating activities
Add: depreciation expense
Add: interest expense
Less: gain on asset
Less: accounts receivable
Add: inventory
Add: prepaid insurance
Less: interest receivable
Add: accounts payable
Add: wages and salaries payable
Less: advertising expense payable
Less: Interest paid
Less: Income tax paid
175,000
19,000
2,000
(1,000)
(7,000)
4,000
300
(200)
2,000
4,000
(300)
197,800
(2,000)
(54,600)
141,200
Calculating the cash flows from investing and financing activities is no

different from the direct method. The only difference between the two
methods is the way cash flows from operating activities is
presented.
20
Notes to the cash flow statement

Lets assume that we use the direct method when constructing a
statement of cash flow. To every statement there are accompanying
notes, which are found in the notes section of financial reports. Cash flow
statements should be read in conjunction with these notes to get the
whole picture. The number of the note is indicated next to the
corresponding item on the cash flow statement within the note column.
The first note will usually correspond with the last line of the cash flow
statement (cash and cash equivalents at end of period). This note just
indicates the amount of cash and short term deposits that make up cash
and cash equivalents.
6. Cash and cash equivalents
30 June 2012
Cash at bank
Short term deposits
Cash and cash equivalents
$27,000
$8,000
$35,000
Short term deposits mature between 30 and 60 days. The fair value of cash and
cash equivalent is equal to carrying value.
The second note will outline how cash from operating activities was
determined. This is simply the indirect method of determining cash from
operating activities. At the bottom of this it is important to disclose any
non-cash investing and financing activities.
11. Reconciliation of net income before tax from operating activities to profit.
Cash from operating activities
175,000
Add: depreciation expense
19,000
Add: tax expense
(54,600)
Less: gain on asset
(1,000)
Less: accounts receivables
(7,000)
Add: inventory
4,000
Add: prepaid insurance
300
Less: interest receivable
(200)
Add: accounts payables
2,000
Add: wages and salaries payable
4,000
Less: advertising expense payable
(300)
Less: Interest paid
(2000)
141,200
Non-cash investing and financing activities
During the period, the company issued $1,000,000 of new securities under a
dividend reinvestment plan. $4,000,000 was raised through the issue of these
securities and thus is not reflected in the Cash Flow Statement on the basis that it
has been reinvested in the companys securities.
21
Analysing Cash Flow Statement

When analysing a cash flow statement it should be compared with the
companys income statement. You want to compare cash from operating
activities with net income. If cash from operating activities exceeds net
income then the company is said to be doing well, that is, they are
receiving cash from the sale of goods in a timely and effective manner.
However if net income exceeds cash from operating activities the
question must be asked, why is the company not receiving cash for their
goods sold or services rendered. The main reason will be either to many
bad debts (debtors refusing to pay their accounts) or accounts are not
being paid in a timely manner.
Net income was calculated to be $120,400. The cash generated from
operating activities amounted to $141,200. This indicates that debtors
accounts are being received and are being received in a timely manner.
The other sections of the cash flow statement should also be analysed to
see how well the company performed in both investing and financing
activities.
However, dont be fooled. The cash flow statement can also be
misleading. The cash flow statement can be easily manipulated to show
or rather not show what business entities decide. Business entities can
make cash flows appear better by not paying off any short term or long
term liabilities, not acquiring any new capital, such as land and equipment
or by selling off non-current assets that shouldnt be sold. Doing this
however will affect future periods, like having to buy back that asset that
they sold that shouldnt have been, or having to outlay twice the amount
of cash for short term or long term liabilities. This is why it is important,
if possible, to review previous period cash flow statements in order to get
the whole picture!
Cash flows statements dont show non-cash transactions like the trading
in of an asset for a new model or the purchase of non-current assets by
long term debt.
So to conclude, the cash flow statement can tell us a lot about a
companys performance and the way in which they use the cash they
generate; just keep in mind, that theres a lot left to the imagination.
22

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We All Start Somewhere

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Statement of Cash Flows

As we know, annual financial reports are comprised of:

Statement of Cash Flows

The Purpose of Cash Flow Statements

The business entities ability to meet current liabilities like

The business entities ability to buy or sell non-current assets like

Usually business entities perform transactions on credit, like the purchase

Statement of Cash Flows

Cash and Cash Equivalents

Statement of Cash Flows

Cash Flow Statement Classifications

Statement of Cash Flows

Cash flows from investing activities

Cash flows from financing activities

Statement of Cash Flows

The Relationship between the Cash Flow

liabilities (excluding cash at bank)

is reported under cash flows from operating activities.

is reported under cash flows from financing activities.

A change in non-current liabilities and owners equity

Statement of Cash Flows

The change in cash

Statement of Cash Flows

Creating a Cash Flow Statement

1. Issued ordinary shares for cash $500,000

Cash received from customers $150,000

9. Paid wages and salaries expense $21,000

Cash flows from operating activities

Purchase of investments 11 (outflow)

Cash flows from financing activities

Statement of Cash Flows

Net income before tax

Statement of Cash Flows

Creating a Cash Flow Statement Direct

Statement of Cash Flows

2. Calculating cash paid to suppliers and employees

Statement of Cash Flows

Calculating cash paid to employees

Calculating cash paid for advertising

Calculating cash paid for prepaid expenses

Statement of Cash Flows

3. Calculating interest revenue and interest expense

Calculating interest expense

Statement of Cash Flows

Calculating cash flows from operating activities

Cash flows from investing activities

Statement of Cash Flows

Calculating the gain/loss on the disposal of assets

Cash flows from financing activities

If owners equity increases cash increases

Statement of Cash Flows

Net increase (decrease) in cash and cash equivalents

Statement of Cash Flows

Completed statement of cash flow

Cash flows from investing activities

Cash flows from financing activities

Net increase (decrease) in cash and cash equivalents

Statement of Cash Flows

Creating a Cash Flow Statement

Statement of Cash Flows

7. Subtract any decreases in current liabilities or add any increases in

Statement of Cash Flows