LESSON 7. Cash Flow Statement

Transcription

1 LESSON 7 Cash Flow Statement 1 Outline 7.1. Introduction: definition and purpose Format of the Cash Flow Statement Definition of cash and cash equivalents Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities 2 1

2 The annual accounts Balance Sheet Income Statement Statement of Changes in Equity Cash Flow Statement Notes to the Financial Statements 3 Statements of financial flows Includes information about: Financial resources (cash flows) obtained by the firm during the period Applications of those financial resources (cash flows) Operating activity Business activity Purchase of assets Shareholders contributions Distribution of Dividends New debt Sale of assets Payment of debt. 4 2

3 Cash Flow Statement The Cash Flow Statement shows: cash receipts, and cash payments during the year. These cash receipts and payments explain the changes in the cash account (*) of the Balance Sheet during the year. (*) Cash will include cash and cash equivalents 5 Cash Flow Statement Regulation INTERNATIONAL IAS 7 SPANISH P.G.C Is voluntary for: Companies that can publish abbreviated annual accounts SMEs that can apply the PGC de PYMES

4 Usefulness Of Cash Flow Statement According to IAS 7, the Cash Flow Statement should help investors and creditors assess: The ability to generate future positive cash flows The ability to meet obligations and pay dividends Reasons for differences between income and cash receipts and payments Both cash and noncash aspects of firms investing and financial transactions 7 Usefulness Of Cash Flow Statement The financial viability and survival prospects of any company rest on the ability to generate net positive cash flows. Cash flows help to reduce an organization s dependency on external funding, service existing debts and obligations, finance investments, and reward the investors with an acceptable dividend policy. The end-result is that independent of reported profits, if a company is unable to generate sufficient cash, it will eventually fail. Elliot & Elliot (2005, 613) 8 4

5 Cash Flow Statement PGC, 2007, section 3 (Annual Accounts): The CFS informs about: Sources and applications of cash and cash equivalents classifying the movements by type of activity and showing the net change in that magnitude during the exercise. 9 Cash Flow Statement Basic Concepts (PGC, 2007) Cash & Cash equivalents Those shown in heading B.VII of Assets in the Balance Sheet, that is: Cash on hand Demand deposits with financial institutions Financial instruments that are: (1) convertible to known amounts of cash, (2) with an original maturity of three months or less at the moment of acquisition (3) so that they present negligible risk of changes in value (4) and they are use in the normal cash management of the company Chance bank overdrafts, when they are used in the cash management of the company 10 5

6 Cash Flow Statement Basic Concepts (PGC, 2007) CF from Operating Activities Those generated from the activities that constitute the main source of revenues of the company, as well as from other transactions not classified as financing or investment activities. The change in cash flows derived from these activities will be shown by its net value, except for the cash flows from interests, dividends received and income tax, that will be shown separately. 11 Cash Flow Statement Basic Concepts (PGC, 2007) CF from Investing Activities From the acquisition and disposal of long-term assets and other investments not included in cash equivalents, such us intangible assets, tangible assets, investment property and financial investments. CF from Financing Activities Cash receipts from the acquisition by third parties of the company s equity or debt instruments, or from resources received from financial institutions, as well as the cash payments made for the amortization or refund of those amounts. It also includes the cash payments to shareholders as dividends. 12 6

7 CASH RECEIPTS Collections from customers Receipts of interest and dividends on investments Other operating receipts Sale of plant assets Sale of investments that are not cash equivalents Receipts on loans receivables (credits) Issuing stock Selling treasury stock Borrowing money Operating activities Investing activities Financing activities CASH PAYMENTS Payments to suppliers Payments to employees Payments of interest and income tax Other operating payments Acquisition of plan assets Purchase of investments that are not cash equivalents Making loans Payments of dividends Purchase of treasury stock Payment of principal amount of debts 13 Financial Accounting 09/10 2ºDE LESSON 7 Adapted from Harrsion & Mª Horngren Cristina (2001, Abad Navarro, 540) 2009 Cash flows from operations Expenses paid in cash Revenues earned in cash Expenses paid in the short term Revenues earned in the short term Expenses paid in the long term Revenues earned in the long term Expenses that will never be paid Revenues that will never be earned Cash Flows from Operations (CFO) Net Income 14 7

8 Cash flows from operations Expenses paid in cash Revenues earned in cash Cash Flows from Operations (CFO) There are two possible methods for calculating CFO: Indirect method Direct method 15 CFO Direct method - Example Cash Flows from Operating Activities (Direct method) Business activities: Cash receipts from the sale of good and the rendering of services Cash receipts from royalties, fees, commissions and other revenue Cash payments to suppliers of goods and services Cash payments to and on behalf of employees Cash payments of V.A.T. Financial expenses and revenues: Cash receipts from interest and dividends received Cash payments of interest Income tax: Cash payments or refunds of income taxes Cash Flows from Operations (Net cash from operating activities) CFFO

9 CFO Indirect method - Example INCOME FOR THE YEAR +/- ADJUSTMENTS TO INCOME + depreciation expense + losses from impairment - transfers of capital grants. +/- CHANGES IN WORKING CAPITAL +/- change in inventory +/- change in account receivables and other receivables +/- change in accounts payables and other payables. Cash Flows from Operations (Net cash from operating activities) 17 CFO - PGC Income before taxes 2. Adjustments to income a) Depreciation of fixed assets (+). b) Value corrections for impairment (+/-). c) Change in provisions (+/-). d) Transfer of grants (-). e) Income from disposal of non-current assets (+/-). f) Income from disposal of financial instruments (+/-). g) Financial revenues (-). h) Financial expenses (+). i) Exchange differences (+/-). j) Change in fair value of financial instruments (+/-). k) Other revenues and expenses (-/+). 3. Changes in working capital a) Inventory (+/-). b) Accounts receivables and other receivables (+/-). c) Other current assets (+/-). d) Accounts payables and other payables (+/-). e) Other current liabilities (+/-). f) Other non-current assets and liabilities (+/-). 4. Other cash flows from operating activities a) Cash payments of interests (-). b) Cash receipts of dividends (+). c) Cash receipts of interests (+). d) Cash receipts (payments) for income taxes (+/-). e) Other cash payments (receipts) (-/+) 5. Cash flows from operating activities (+/-1+/-2+/-3+/-4) 18 9

10 Cash flows from operations 2. Adjustments to income a) Depreciation of fixed assets (+). b) Value corrections for impairment 1 (+/-). c) Change in provisions 2 (+/-). d) Transfer of grants (-). e) Income from disposal of non-current assets (+/-). f) Income from disposal of financial instruments (+/-). g) Financial revenues (-). h) Financial expenses (+). i) Exchange differences (+/-). j) Change in fair value of financial instruments (+/-). k) Other revenues and expenses (-/+). REASONS Value corrections that do not imply a cash movement Income from operations that are classified as investing activities To show this cash receipts/payments separately Value corrections that do not imply a cash movement 1 Impairment of non-current assets 2 Change in long-term provisions 19 A) CONTINUING OPERATIONS 1. Net turnover. 2. Change in inventory of finished goods and work-in process. 3. Work performed for own assets. 4. Procurements. 5. Other operating revenues. 12. Financial revenues. a) From holdings in equity instruments. a1) Of subsidiaries and associated companies. a2) Of third parties. b) From marketable securities and other financial instruments. b 1) Of subsidiaries and associated companies. b 2) Of third parties. 6. Personnel expenses. 13. Financial expenses. 7. Other operating expenses. 8. Fixed assets depreciation expense. 9. Transfer of grants of non-financial non-current assets and others. 10. Excess of provisions. a) Of subsidiaries and associated companies. b) Of third parties. c) From capitalization of provisions. 14. Change in fair value of financial instruments. a) Held for trading and others. 11. Impairment and income from disposal of noncurrent assets. b) Transfer to income for the year for available for sale financial instruments. a) Impairment and losses. 15. Exchange differences. b) Income from disposals and others. A.1) OPERATING INCOME ( ) 16. Impairment and income from disposal of financial instruments. a) Impairment and losses. b) Income from disposals and others. A.2) FINANCIAL INCOME ( ) A.3) INCOME BEFORE TAXES (A.1 + A.2) 20 10

11 Cash flows from operations 3. Changes in working capital a) Inventory (+/-). b) Accounts receivables and other receivables (+/-). c) Other current assets (+/-). (-) Revenues of this year that will generate cash receipts in future years Cash payments of this year that will be registered as expenses in future years (+) Revenues of previous years collected in cash during this year Expenses of this year paid in cash in previous years d) Accounts payables and other payables (+/-). e) Other current liabilities(+/-). (+) Expenses of this year that will generate cash payments in future years Cash receipts of this year that will be registered as revenues in future years (-) Expenses of previous years paid in cash during this year Revenues of this year collected in cash in previous years f) Other non-current assets and liabilities (+/-) For specific adjustments (e.g. payment of long-term provision) 21 B) CURRENT ASSETS I. Non-current assets held for sale. II. Inventories. 1. Commercial (goods for sale). 2. Raw materials and other supplies. 3. Work-in process. 4. Finished goods. 5. Auxiliary products, consumables and replacements. 6. Advances to suppliers. III. Trade accounts receivables and other receivables. 1. Trade accounts receivables for sale and services. 2. Accounts receivables from subsidiaries and associated companies. 3. Sundry accounts receivables. 4. Employee receivables. 5. Assets for current tax. 6. Other receivables from public authorities. 7. Called subscribed capital receivable. IV. Short-term investments in subsidiaries and associated companies. V. Short-term financial investments. VI. Accrual accounts. VII. Cash and cash equivalents. NO NO 22 11

12 C) CURRENT LIABILITIES I. Liabilities linked to non-current assets held for sale II. Short-term provisions. III. Short-term debt. 1. Debentures and other negotiable securities. 2. Short-term debt payable to credit institutions. 3. Short-term debt from leasing contracts. 4. Derivative financial instruments. 5. Other financial liabilities. IV. Short-term debt payable to subsidiaries and associated companies. V. Trade accounts payables and other payables. 1. Trade accounts payables for purchases and services. 2. Accounts payables to subsidiaries and associated companies. 3. Sundry accounts payable. 4. Salary payable. 5. Liability for current tax. 6. Other payables to public authorities. 7. Customer advances. VI. Short term accrual accounts. NO 23 Cash flows from operations 4. Other cash flows from operating activities a) Cash payments of interests (-). b) Cash receipts of dividends (+). c) Cash receipts of interests (+). d) Cash receipts (payments) for income taxes (+/-). e) Other cash payments (receipts) (-/+) Direct method 24 12

13 Cash flows from investment activities B) CASH FLOWS FROM INVESTMENT ACTIVITIES 6. Cash payments for investments (-) a) Subsidiaries and associated companies. b) Intangible assets. c) Tangible fixed assets. d) Investment property. e) Other financial assets. f) Non-current assets held for sale. g) Other assets. 7. Cash receipts from disinvestments (+) a) Subsidiaries and associated companies. b) Intangible assets. c) Tangible fixed assets. d) Investment property. e) Other financial assets. f) Non-current assets held for sale. g) Other assets. 25 Cash flows from financing activities C) CASH FLOWS FROM FINANCING ACTIVITIES 9. Cash receipts and payments for equity instruments a) Issuing of equity instruments (+). b) Amortization of equity instruments (-). c) Acquisition of the own equity instruments (-). d) Disposal of the own equity instruments (+). e) Grants, donations and legacies received (+). 10. Cash receipts and payments for debt instruments a) Issuing of 1. Debentures and other negotiable securities (+). 2. Long term debt payable to credit institutions (+). 3. Long term debt payable to subsidiaries and associated companies (+). 4. Other debt (+). b) Refunds and amortization of 1. Debentures and other negotiable securities (-). 2. Long term debt payable to credit institutions (-). 3. Long term debt payable to subsidiaries and associated companies (-). 4. Other debt (-). 11. Cash payments of dividends and remuneration of other equity instruments. a) Dividends (-). b) Remuneration of other equity instruments (-)