When you have completed the module you should revise the quiz and the review tasks.

Transcription

1 Introduction An important part of your role on the management committee is to monitor and control the financial dealings of the organisation. To do this you need to read, understand, analyse and query the information provided to the committee in a number of different financial reports. The three key financial reports prepared under the accounting process are the Income and Expenditure Statement, the Balance Sheet and the Cash Flow Statement. Each of these reports shows a different aspect of the financial status of the organisation. In this module we explore Cash Flow Statements from two organisations, Sunnyway Training Services Inc and ARC Adult Education. We will consider what you should look for in a Cash Flow Statement and questions you should ask about the information it contains. Before you begin If you already have some knowledge of using and interpreting Cash Flow Statements, you might choose to begin with the Quick quiz on page 9 at the end of this module and then the Review tasks on page 10. When you have answered as many of the quiz and review questions as you can, come back to the beginning of this module and begin to work through it, to: confirm or revise your answers find the answers you did not know. When you have completed the module you should revise the quiz and the review tasks. If you have little or no knowledge of using and interpreting Cash Flow Statements, read on. Key learning outcomes The learning outcomes for this module are divided into two categories learning which involves improving your knowledge or understanding, and learning which develops skills and strategies. After successfully completing all the exercises in this module you will: understand the need for monitoring and controlling finances be able to analyse and question the data in Cash Flow Statements be able to monitor financial reporting procedures in the organisation in relation to Cash Flow Statements. 001

2 Accounting Practices: Cash Flow Statements Cash Flow Statements What is a Cash Flow Statement? A Cash Flow Statement is a record of receipts and payments for a specific period of time. The statement shows, and explains, the difference between the opening and closing balances of cash at the beginning and end of the given accounting period. The statement provides a summary of cash transactions and details of: cash movements from operating activities (eg provision of courses) investing activities (eg purchases of equipment) financing activities (eg borrowings from banks). If you are using cash accounting you will need to develop a Cash Flow Statement to determine your cash position. If you find, for example, that a deficit will result from your planned activities then corrective action will need to be taken. This could be achieved by attracting additional fee revenue or reducing expenditure. When is a Cash Flow Statement presented? A Cash Flow Statement is presented: when the cash effect of transactions for a given period needs to be known when explanations are required for cash movements in an organisation. An example might be when the cash effect of past results or future events (budgets or forecasts) needs to be known. The Cash Flow Statement is one of the key financial statements of an organisation. What should you look for in a Cash Flow Statement? When reviewing the Cash Flow Statement the committee should ask: Is the organisation s cash flow positive? If it is not, are there good reasons why it is not? Is further investigation warranted? To the extent that the operations of an organisation follow a cycle, it should be possible to see this cycle reflected in the organisation s cash flow. For example, it may be that, towards the end of a term, receipts of student fees decline whilst expenditure on items such as curriculum development for the following year reach a peak. In this situation it might be reasonable to observe a negative cash flow. A negative cash flow is not, of itself, a bad thing, provided that it is part of an overall cycle for which the cash flow is generally positive. 002

3 Has prudent use been made of the organisation s funds and its sources of funds? Management of cash is a discipline, the results of which should be apparent in the Cash Flow Statement. For example, growing cash surpluses may be used to retire debt, or they may be invested. Returns on temporary surpluses may be maximised through short-term investing activities. Temporary shortfalls in cash should be anticipated so that financing can be arranged ahead of time and at reasonable rates, thus preserving relationships with, and instilling confidence in, financiers. The committee must critically analyse where cash has come from and where it has been used. Categorising financial activities in the Cash Flow Statement When recording cash flow information in the Cash Flow Statement, the activities of the organisation are divided into three groups: Operating activities All cash received or spent on normal operating activities of the organisation such as: income from funding allocations, fees, memberships etc. wages and salaries operating expenses, including interest on loans. Investing activities Cash received from the sale of a non-current asset, or spent on non-current assets, such as: sale of furniture sale of motor vehicle purchase of equipment. Financing activities Cash received from sources of finance or money spent on repayments of finance such as: money from loans repayment of loans (principal, not interest) capital input. Payments are subtracted from receipts in each group to calculate net cash. The total represents the change in cash balance for the period. The ending balance of cash in the Cash Flow Statement is the same as the cash balance in the Balance Sheet. In a Cash Flow Statement cash balance refers to the total of all cash accounts, ie cash at bank plus cash on hand plus petty cash. 003

4 Accounting Practices: Cash Flow Statements What does a Cash Flow Statement look like? The following is an example: Sunnyway Training Services Inc Cash Flow Statement for year ended 31 December $ $ Cash flows from operating activities Receipts from course fees and services 171, ,500 Payments to suppliers and employees (210,800) (171,530) Interest received 6,000 6,000 Funding allocations received 66,000 63,000 Net cash provided by operating activities 32,400 55,970 Payments for property, plant and equipment (6,000) (10,800) Proceeds from disposal of property, plant and equipment 2,000 3,100 Net cash provided (used) in investing activi ties (4,000) (7,700) Cash flows from financing activities Repayment of building loan (28,300) (47,270) Net cash provided (used) in financing activities (28,300) (47,270) Net increase (decrease) in cash held 100 1,000 Cash at beginning of the reporting period 8,300 7,300 Cash at end of the reporting period 8,400 8,

5 Q Exercise 5.1: Cash flow You are a new member of the management committee of ARC Adult Education. The management committee has been provided with the Cash Flow Statement on page 6. Describe for your fellow ARC committee members what the statement indicates about the organisation s use of cash in 2004 and 2005, and the cash position at 31 December You may want to consider ARC s Income and Expenditure Statements and its Balance Sheets in presenting your observations of the Cash Flow Statement. You may choose to: think about your answers and, if possible, discuss them with others on your committee make notes in the space below, before you discuss them record your answers in your own learning notes (keep your learning notes handy as you work through the module) Discussion notes 005

6 Accounting Practices: Cash Flow Statements ARC Adult Education Cash Flow Statement for Year Ended 31 December Cash flows from operating activities $ $ Receipts from patrons, members and the public 64,012 76,100 Payments to suppliers and employees (111,174) (76,480) Interest received Funding allocations received 34,000 34,000 Net cash provided by operating activities (13,060) Cash flows from investing activities Payments for property Payments for furniture and equipment Proceeds from disposal of furniture and equipment Proceeds from disposal of investments (147,000) (25,858) 820 5,878 (234,000) 5,810 5,500 Net cash provided (used) in investing activities (166,160) (222,690) Cash flows from financing activities Receipt of building loan 176, ,000 Net cash provided (used) in financing activities 176, ,000 Net increase (decrease) in cash held (3,220) (8,140) Cash at beginning of the reporting period 8,320 16,460 Cash at end of the reporting period 5,100 8,

7 A Answers Exercise 5.1 You were asked to describe what the statement indicates about ARC's use of cash in 2004 and 2005, and the cash position at 31 December 2005 From ARC s Cash Flow Statement it is apparent that, in the last two years, the organisation s operating activities have produced a small positive cash flow. This has been in the form of a healthy cash surplus in 2004, offset by a cash deficit in Closer analysis, taking into account the Income and Expenditure Statement and the Balance Sheet, shows that receipts in 2004 (from patrons, members and the public) included the fees for that year plus a significant reduction in debtors (shown on the Balance Sheet) down from $18,000 at the end of 2003 to $6,000 at the end of Effectively, this means ARC collected more fees outstanding from the previous year (2003) than it had outstanding at the end of This is why receipts from patrons, members and the public are higher than student fees and other income for that year. Conversely payments to suppliers and employees were held back in 2004, with the level of pre-paid expenses cut from $10,000 to $2,000, and an increase in creditors from $6,000 (at the end of 2003) to $16,000 (at the end of 2004). Increased payments to suppliers and employees in 2005 reversed this trend, with both prepaid expenses increasing and creditors reducing. The swing from operating cash surplus in 2004 to operating cash deficit in 2005 can be largely attributed to this timing of payments. ARC has invested heavily in property in these two years $234,000 for the acquisition of property in 2004 and $147,000 in It has funded this largely through borrowings $180,000 in 2004 and $176,000 in 2005 for building loans. Overall, ARC s cash assets have declined from $16,460 at the beginning of 2004 to $5,100 at the end of

8 Accounting Practices: Cash Flow Statements How are the key financial statements interconnected? The figures in the Cash Flow Statement are reconcilable to the details shown in the Income and Expenditure Statement and the Balance Sheet. The data on all statements comes from the same source. The Income and Expenditure Statement provides information of the trading activity for a given period. The Balance Sheet shows the state of affairs at the end of the period. The Cash Flow Statement gives details of the flow of cash throughout the period. To clarify how statements are interconnected, consider the following situation: Personal scenario Imagine your organisation sold a computer for $1,000. The original price of the computer was $6,500, but over a few years it has depreciated by $3,500. This would show up in each of the three key financial statements: The Balance Sheet would show a reduction in fixed assets of $3,000. This represents the original cost of $6,500 less accumulated depreciation of $3,500. The Income and Expenditure Statement would show a loss of $2,000 on the sale of fixed assets. This is the difference in the book value of the asset $3,000 and the proceeds of $1,000. The Statement of Cash Flow would show $1,000 in Cash Income representing proceeds from the sale of fixed assets. 008

9 Quick quiz Use the questions below to check your understanding of the material covered in this module. If you are unable to complete the quiz, review the appropriate sections of the module. Write short answers in the spaces provided, eg Question 2. In other questions, eg Question 1, you are given more than one possible answer. In this case tick the box or boxes that you think are correct. 1 A Cash Flow Statement is presented every month when the committee requests it when explanations are required about the movement of cash when there is a cash flow problem 2 In the Cash Flow Statement cash balance refers to cash on hand cash at bank petty cash the total of all cash accounts 3 The Cash Flow Statement provides a summary of cash transactions and gives details of. 4 The Cash Flow Statement is a record of receipts and payments for... 5 The figures in the Cash Flow Statement at a specific point in time throughout a period of time at the end of a period of time can be reconciled with the details shown in the Income and Expenditure Statement are quite separate from those in other financial reports can be reconciled with the details shown in the Balance Sheet 6 In the Cash Flow Statement the activities of the organisation are divided into three groups. What are they? 7 The committee should use the Cash Flow Statement to critically analyse 1 operating activities 2 3 where cash has been used budgets or forecasts where cash has come from 009

10 Accounting Practices: Cash Flow Statements Review tasks Task 1 Committee responsibilities When reviewing the Cash Flow Statement the committee should ask questions about: Task 2 How the key financial reports are interconnected 1. The Income and Expenditure Statement provides information 2. The Balance Sheet shows 3. The Cash Flow Statement gives details of 010