Slide 5.1. Chapter 5

Transcription

1 Slide 5.1 Chapter 5 1

2 Slide 5.2 By the end of this chapter, you should be able to: prepare a statement of cash flows in accordance with IAS 7; analyse a statement of cash flows; critically discuss their strengths and weaknesses. 2

3 Slide 5.3 CASH FLOW STATEMENT Cash Flow Statement is a summary of a business s cash receipts and cash payments, over a certain period of time usually one year. It shows the cash that has come from and/or gone to sources external (outside) to the business. 3

4 Slide 5.4 CASH FLOW STATEMENT IAS 7 Cash Flow Statement classifies the sources of cash in terms of: cash flows from operations (operating activities), cash flows from investing activities, and cash flows from financing activities. The Cash Flow Statement has two main purposes: measuring a business financial health, and explaining the relationship between the Income Statement prepared under accrual accounting and the actual movement in cash from operations. 4

5 Slide 5.5 CASH RECEIPTS AND PAYMENTS ON THE CASH FLOW STATEMENT 5

6 Slide 5.6 CASH FLOW STATEMENT Why is it important? Cash is the lifeblood of an entity. A business cannot survive without cash. Cash, not reported profit, pays the bills. A business s ability to raise cash through financing activities is dependent upon its ability to generate cash from operations. Creditors and shareholders are not keen to invest in a business that does not generate enough cash from operations to assure prompt payment of maturing liabilities, interest, and dividends. 6

7 Slide 5.7 FORMAT OF THE CASH FLOW STATEMENT BRINGS OUT KEY FIGURES For management decision and control. For example: month-end balances Assist in the control of liquidity; cash deficiencies identify how much must be financed; Early warning allows management to approach appropriate sources; Cash surpluses identify amounts to be invested on the best terms. 7

8 Slide 5.8 The Cash Flow Statement is designed to assist stakeholders to assess: the ability of a business to generate positive cash flows in future periods both the cash and non-cash aspects of the business investing and financing transactions for the period The Cash Flow Statement reports the business investments in such assets as plant and equipment. the business ability to meet its obligations (creditors and suppliers) and to pay dividends (shareholders) 8

9 Slide 5.9 Warm up exercise 1 to 10 9

10 Slide 5.10 STATEMENT OF CASH FLOWS Ongoing operations Investments Financing Can we pay debts? Can we keep investing? Can we pay dividends? 10

11 Slide 5.11 OPERATING ACTIVITIES Direct Method Indirect Method Developed from the firm s cash book information Developed from the firm s accrual accounting records using information contained in the income statement and balance sheet. Reconciles operating cash flow to net operating profit 11 Used by 99% of companies

12 Slide 5.12 OPERATING ACTIVITIES INDIRECT METHOD Step 1 Net Income + Depreciation* *Change in Accumulation depreciation ending balance plus accumulated depreciation debited as a result of disposals. 12

13 Slide 5.14 OPERATING ACTIVITIES INDIRECT METHOD Step 2 Analyze changes Noncash Current Assets & Liabilities 14

14 Slide 5.16 OPERATING ACTIVITIES INDIRECT METHOD Step 3 Adjust - Gains or + Losses Under U.S. GAAP and IFRS rules, proceeds of asset disposals must be included in the investing activities. Under Operating activities substract gains and/or add losses of such asset disposals. 16

15 Slide 5.18 Let s look at an example DAY 2 CASH FLOW EXAMPLE APPAREL.XLSX 18

16 Slide 5.19 cash ins and cash outs Operating: related to revenue and expense affecting net income. Investing: related to acquiring or disposing of noncurrent assets Financing: related to borrowing and repaying principal and activities with the stockholders Change in cash 19 balance

17 Slide 5.20 SUMMARY OF KEY CONCEPTS 20

18 Slide 5.23 INTERPRETING THE STATEMENT OF CASH FLOWS WITHIN THE COMPANY S CONTEXT Start-up Comparing operating CF to sales Comparing operating CF to current liabilities 23

19 Slide 5.24 FREE CASH FLOWS Ability to fund Capital expenditures and Pay dividends With Operating net cash Net Cash Provided by Capital Free Cash Flow = Operating Activities Expenditures Dividends $ 93 = $ 259 $ 138 $ 28 24

20 Slide 5.25 ANALYSING A CASH FLOW STATEMENT Interest cover Impact of working capital movements Need for additional information Evaluating investing activities Relate expenditure to depreciation charge. Evaluating financing cash flows Extent to which investing has been financed. 25

21 Slide 5.26 How much is needed? When? When will it be repaid? Other option Analysis as justification Repayment agreement Collateral Other Letter to the bank requesting an overdraft facility The maximum overdraft facility of xxxxxx will be required at the end of January. will be eliminated by July. Overdraft will fall progressively as per the cash budget. It might be practical to request a limit of xxx for the full 6-month period, reducing it to xxx thereafter to allow for contingencies. The facility is only to be called on as required. Refer to the cash budget to support the request and confirm that it is based on the most likely scenario. agree to a repayment schedule. Specify that collateral security is available in the form of remises if it should be required. If not an existing customer give outline details of business background. Explain future plans. 26

22 Slide 5.27 ALTERNATIVES TO OVERDRAFT FACILITY Consider alternatives such as the following: Tighter controls on trade receivables Longer terms with suppliers Leasing vehicles and/or machinery; Mortgaging the property; Introducing more capital. 27

23 Slide 5.28 DIRECT METHOD Reports cash inflows and outflows directly Starts with gross cash receipts and payments Provides more information about sources/uses of cash Shows operating cash receipts and payments Possibly more useful in assessing future cash flows Useful in failure prediction models. 28

24 Slide 5.29 CASH FLOW STATEMENT DIRECT METHOD Operating cash flows: Cash from customers (cash inflow) Sales Less: Changes in Accounts receivable Payments to suppliers (cash outflow) Cost of sales plus changes in inventory Less: Changes in Accounts payable Expenses Less: Depreciation XXX,XXX XXX XXX,XXX XX,XXX (X,XXX) XX,XXX XXX,XXX (X,XXX) XXX,XXX The difference between cash inflow and cash outflow gives cash flow from operations. 29

25 Slide 5.30 DIRECT METHOD OF CALCULATING CASH PAYMENTS FROM OPERATING ACTIVITIES 30

26 Slide 5.31 DIRECT METHOD OF CALCULATING CASH PAYMENTS FROM OPERATING ACTIVITIES 31

27 Slide 5.32 CASH FLOWS FROM INVESTING ACTIVITIES 32

28 Slide 5.33 CASH FLOWS FROM FINANCING ACTIVITIES 33

29 Slide 5.34 References Elliott, Barry, Elliott Jamie, Financial Accounting and Reporting 15 th Edition chapter 5 Ray H.Garrison, Peter C. Brewer,& Eric W.Noreen, Introduction to Managerial Accounting, 4th Edn. (Bilingual Version), 管理会计导论 ( 第 4 版 )( 双语版 ), DongBei University of Finance and Economics Press, 东北财经大学出版社, 2008, (ISBN: ) Chapter