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Transcript of IAS 7 Statement of Cashflow - C3%A2%C2%80%C2  IAS 7 – Statement of Cashflow...

  • IAS 7 Statement of Cashflow

  • IAS 7 Statement of Cashflow

    Why do we need to prepare a cashflow statement? The fundamental purpose of being in business is to generate a profit. However, profitability is arguably a long-term objective. In the short-term, business viability is determined by its ability to generate cash. Even very profitable companies will collapse if they do not have access to sufficient cash resources when it becomes necessary to settle a bill. Information about cashflows is therefore needed in order to allow users form an opinion about the liquidity of the business. The purpose of IAS 7 is to provide such information.

  • IAS 7 Statement of Cashflow

    Aim of Statement of Cash flow is to show the movement in Cash and Cash Equivalents from one yr to next.

    Cash includes;- Cash on hand Demand deposits Bank overdrafts Cash Equivalents include;- Short-term highly liquid investments that are convertible to

    known amounts of cash and are subject to insignificant risk of changes in value (usually having a maturity date of 3 mths or less)

  • IAS 7 Statement of Cashflow

    Profit and Cash are not the same. A very profitable business does not necessarily translate into a business with cash. There are three reasons why Profit and Cash are NOT the same;-

    (1) Treatment of Capital Items

    (2) Treatment of Non Cash Items

    (3) The Accruals Concept

  • IAS 7 Statement of Cashflow

    The format of the Statement of Cash Flow is very important see page

  • IAS 7 Statement of Cashflow

    In the Statement of Cash Flow, all cash flows are classified under one of three headings;-

    Cash flow from Operating Activities

    Cash flow from Investing Activities and

    Cash flow from Financing Activities

  • IAS 7 Statement of Cashflow

    Cash Flow from Operating Activities Key part of Cash flow statement. Shows whether business is generating cash from its main

    business eg Brown Thomas cash flows earned from selling clothes and cosmetics.

    There are two methods for calculating the Cash flow from Operating Activities;-

    (1) Direct Method and (2) Indirect Method We will focus on Indirect Method.

  • IAS 7 Statement of Cashflow

    Cash Flow from Operating Activities Indirect Method

    Starting point is Profit before tax (from SOCI)

    Next, adjust this profit figure by removing any non-cash items such as depreciation, profit/loss on sale of assets

    Next, we must adjust the Profit figure for Movements in Working Capital (Inventories, Trade Receivables, Trade Payables). This is done by comparing the balances for these items in the Statement of Financial Position for this year versus last year and adding or subtracting the difference to the profit figure

    Finally, we must adjust for interest paid and tax paid.

    Result = Cash Flow from Operating Activities.

  • IAS 7 Statement of Cashflow

    The aim of the above is to adjust the Profit/Loss before interest and tax (from SOCI) for the effects of the items that results in profit and cash being different.

    The result of all the adjustments is Cash flow from Operating Activities which shows how much cash was generated by the business from its main business.

  • IAS 7 Statement of Cashflow

    Cash flows from Operating Activities (Indirect Method) Profit before tax X Adjustments for Non-Cash items Profits/Losses on sale of assets X Amortisation Interest Expense X Depreciation X Operating profit before working capital changes X Increases/Decreases in Receivables Increases/Decreases in inventory X Increases/Decreases in Payables X Cash generated from operations X Interest paid (X) Tax paid (X) Net cash flows from operating activities X

  • IAS 7 Statement of Cashflow

    Cash Flow from Investing Activities

    Includes;-

    Cash payments to acquire non current assets (requires a T-Account or working) VERY IMPORTANT

    Cash receipts from the sale of non current assets

    Interest and Dividends Received

    Grants received towards purchase of non-current assets

  • IAS 7 Statement of Cashflow

    Financing Activities Includes;- Cash proceeds from the issue of shares or receipt of loan Cash inflow Repayment of a loan cash outflow Payment of dividends cash outflow Calculating the cash inflow/outflows on these items is straightforward involves comparing the opening balance and closing balance on these accounts to determine the movement.

  • IAS 7 Statement of Cashflow

    Importance of a Cash Flow Statement

    Very useful when assessing the performance of a business gives detailed information as to where a company is generating cash from and where cash is being spent

    Can highlight liquidity problems of the company in conjunction with ratio analysis

    Interpreting a Cash Flow Statement

    When interpreting a cash flow statement of a company, a number of important points need to be borne in mind

  • IAS 7 Statement of Cashflow

    Approaching a Statement of Cash Flow Question;-

    (1) Read the requirements of the question

    (2) Read the question itself carefully

    (3) Set out Opening and Closing Cash & Cash Equivalents and Increase/decrease in Cash & Cash Equivalents

    (4) Commence Cashflows from Operating Activities

    (5) Commence Cashflows from Investing Activities

    (6) Commence Cashflows from Financing Activites

    (7) Do the sum of the 3 sections above equal the Increase/Decrease in Cash and Cash Equivalents as derived in Step 3??

  • IAS 7 Statement of Cashflow

    Miscellanous Points

    For the Purposes of Working Capital Movements

    Trade Receivables includes prepayments (but excludes prepayments relating to interest and taxation)

    Trade Payables include Accruals (only to the extent of accruals which are not dealt with separately in another part of Statement of Cashflow) e.g. Accrued Interest and Taxation).

  • IAS 7 Statement of Cashflow

    Miscellanous Points

    Cash Generated From Operations Figure

    When reviewing a Statement of Cashflow, this is a key figure to examine

    Can the entity finance its Interest Charge and Taxation Charge from its Cashflows from Operating Activities?

  • IAS 7 Statement of Cashflow

    Miscellanous Points

    Cash and Cash Equivalents At Beginning/End of Period

    In the exam, transcribe these figures direct from the question

    i.e. Bank/Bank Overdraft Figures and any Cash Equivalents like Deposit Accounts.

    Do not depend on your Worked Solution to get the figure for Cash and Cash Equivalents at end of Period.

  • IAS 7 Statement of Cashflow

    Miscellanous Points

    Identifying Ordinary Dividends Paid

    - 1) When there is no Accrual for Ordinary Dividends: Reconcile Opening & Closing retained Earnings to identify if an ordinary dividend paid.

    - 2) When there is an Accrual for Ordinary Dividends : Reconcile Opening & Closing Balance on Accrual for Ordinary Dividends to identify if an Ordinary Dividend was accrued for.

    In situation 2, amounts debited to retained earnings represent accrued ordinary dividends. Ordinary dividends paid will be identified by reconciling opening & closing Accrual for Ordinary Dividends