What to do before you even start Calculate the change in cash flow before preparing cash flow...

What to do before you even start

• Calculate the change in cash flow before preparing cash flow statement;

• Knowing the answer beforehand will give you the hint;

• 2008 - cash $2 and an overdrawn bank account at $14;

• 2009 – cash is $17 and you repaid your “bank overdraft”;

• $17+$14-$2=$29; increase in cash

Cash flow Operating activity

• Step 1: calculate how much you received from customers;

• Sales – Increase in Trade Debtors (Accounts Receivable);

• 591- (123-115)=583;• As you have “other operating income” of $21

add that to $583;• Now your total amount received from

customers is $604;

Cash paid to suppliers and employees

• Step 2: take “cost of sales” which is $307 and deduct decrease in “Inventory” and add decrease in “Trade creditors”;

• Now calculate your operating activity;• Take “other expense” and deduct

depreciation;• Add increase in “prepaid expenses”;• Deduct increase in “Accruals”;

Cash paid to suppliers and employees

• Now let’s do the calculations with real numbers;

• $307-$3+$5+$12+$10-$4=$327;• $3=$44-$41; decrease in inventory • $5=$44-$39; decrease in AP• $12=$91-$79; other exp – depr.• $10=$16-$6; increase in prep.exp• $4=$15-$11; increase in accruals

Operating activity

• We really paid interest as we have no interest payable in “current liabilities”;

• We paid taxes, but not the one that is shown in “Income Statement” as in “current liabilities” this amount is an unpaid one;

• So, we take last year’s tax because particularly that one was paid;

Operating activity

• Interest paid - $23;

• Tax paid - $32;

Cash flows from operating activities

Cash flows from operating activitiesCash receipts from customers (583+21) 604Cash paid to suppliers and employees(309+18) (327)Cash generated from operations 277Interest paid (23)Tax paid (32)Net cash from operating activities 222

Now move to the second part

Cash flows from investing activitiesInterest received 2Payments to acquire tangible non-current assets (40+55) (95)Net cash used in investing activities (93)

We are in the last partCash flows from financing activitiesDividends paid (40)Issue of share capital 90Repayment of long-term borrowing (150)Net cash used in financing activities (100)

Net increase in cash and cash equivalents 29Cash and cash equivalents atthe beginning of the financial year (12)Cash and cash equivalents at the end ofthe financial year 17

Let’s calculate investing activity1 January ($) 31 December ($)

Land and buildings – cost or valuation

150,000 200,000

Plant and Machinery:

Cost 80,000 100,000

Accumulated depreciation (20,000) (30,000)

Net 60,000 70,000

Fixtures and fittings:

Cost 20,000 25,000

Accumulated Depreciation (10,000) (12,000)

Net 10,000 13,000

You are told that:

• Land and buildings were revalued upwards by $20,000;

• Fixtures and fittings which had cost $5,000 and which had been depreciated by $3,000 were sold for $1,000;

• Calculate the depreciation for the year;• Prepare “investing activity” of cash flow

statement;

Learn the format!Land and buildings Cost Accumulated

DepreciationBook value (net)

Balance at the start of the year

150,000 ====== 150,000

Less any disposals ======= ====== =====

150,000 ====== 150,000

Plus new acquisitions

X=30,000 ====== 30,000

Plus any revaluation 20,000 ====== 20,000

less depreciation for the year

====== ====== ======

Equals closing balance

200,000 ====== 200,000

Learn the format!Plant and machinery

Cost Accumulated Depreciation

Book value (net)


80,000 (20,000) 60,000

Less any disposals ======= ====== =====

80,000 (20,000) 60,000


X=20,000 ====== 20,000

Plus any revaluation ====== ====== =====


====== X=(10,000) (10,000)


100,000 30,000 70,000

Learn the format!Transaction Cost Accumulated

DepreciationBook value (net)


20,000 (10,000) 10,000

Less any disposals (5,000) 3,000 (2,000)

15,000 7,000 8,000


X=10,000 ====== 10,000

Plus any revaluation ====== ====== ======


====== X=(5,000) (5,000)


25,000 (12,000) 13,000

What is what

• Cost - $5,000• Depreciation - $3,000• Book value - $2,000• We sold it for $1,000;• Our loss on disposal is $1,000;• ($2,000-$1,000);• That $1,000 will be in the Income Statement

as a loss;

Let’s prepare the extract of the investing activity now

Cash flows from investing activities:Purchase of land and buildings – (30,000);Purchase of plant and machinery – (20,000);Purchase of fixtures and fittings – (10,000);Proceeds from sale of fixtures and fittings – 1,000;Net cash used in investing activities (59,000)

©2008 Pearson Prentice Hall. All rights reserved. 12-17

Learning Objective 4

Prepare a cash flow statement by the direct method


Direct Method Collections from

customersSales

Cost of goods sold Payments to suppliers

Salaries expense Payments to employees

Interest expense Interest payments

Income Statement Cash Flow Statement

Income tax expense Income tax paid


Direct Method Formulas

RECEIPTSIncome

StatementBalance Sheet Change

From customers

Sales+ Decrease in accounts

receivable

- Increase in accounts receivable

Of interest Interest revenue

+ Decrease in interest receivable

- Increase in interest receivable



PAYMENTSIncome


To suppliers Cost of goods sold

+ Increase in inventory

- Decrease in inventory

AND

+ Decrease in accounts Payable

- Increase in accounts payable



PAYMENTSIncome


For expenses

Operating expenses

+ Increase in prepaid

- Decrease in prepaids

OR

+ Decrease in accrued liabilities

- Increase in accrued liabilities



PAYMENTSIncome


To employees

Salaries expense

+ Decrease in salaries payable

- Increase in salaries payable

For interest Interest expense

+ Decrease in interest payable

- Increase in interest payable



PAYMENTSIncome


For income taxes

Income tax expense

+ Decrease in income tax payable

- Increase in income tax payable


E12-27

Credit sales $60,000

Ending accounts receivable 32,000

Beginning accounts receivable 22,000

Increase in accounts receivable 10,000

Collections from customers

If more customers buy on account, how

would that affect cash flow?

Add or subtract?


E12-27

Cost of goods sold $111,000

Ending inventory 21,000

Beginning inventory 24,000

Decrease in inventory (3,000)

Ending accounts payable 8,000

Beginning accounts payable 14,000

Decrease in accounts payable 6,000

Payments to suppliers $114,000


Direct Method

• Noncash expenses not listed– Depreciation, depletion and amortization

• Gains and losses not included– Gain or loss does not equal cash received– Cash proceeds included as an investing inflow

• Investing and financing activities reported as explained previously

What to do before you even start Calculate the change in cash flow before preparing cash flow...

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