AYB200 Lecture Notes - Lecture 12: Income Statement, Trial Balance, General Ledger
Lecture 12: Cash Flow Statement
Financial Statements
Purpose of CFS
- Assist in assessing the ability of the company or economic entity to:
o Generate cash flows
o Meet financial commitments as they fall due, including servicing of borrowings and
payment of dividends
o Fund changes in the scope and/or nature of its activities
o Obtain external finance
o By having knowledge of both cash flows and accrual of profits/losses, investors are
likely to be better able to assess the performance and viability of the reporting
entity
o Argued (by some people) to be more reliable than profit data as profit data typically
ased o ueous sujetie ad soeties eatie judgets
o Cash-flo data teds to e oe fatual o ojetie
o Considered by many to be more understandable to users, to give rise to fewer
problems with key terms, and to provide greater comparability between companies
o Cash flows from operations are considered (by some people) to be a superior
performance measure and useful in assessing liquidity and solvency
Why CF Matters
- 80% of small businesses fail within the first three years
- The Top reason for failure is cash flow problems
AASB107: Cash Flow Statements
- Objectives of AASB 107 (preamble):
o to euie the poisio of ifoatio aout the histoial hanges in cash and
cash equivalents of an entity by means of a cash flow statement which classifies cash
flos duig the peiod fo opeatig, iestig ad fiaig atiities
AASB Definitions
- Cash flos: iflos ad outflos of ash ad ash euialets paa 6
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- Cash: on hand (notes and coins held) and demand deposits (deposits on call with financial
institutions)
- Cash equivalents:
- shot-term, highly liquid investments that are readily convertible to known amounts of cash
and which are subject to a isigifiat isk of hages i alue paa 6
Cash Flow Statement Format
Cash Flow Statements: Operating Activities
Interest and Dividends
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Cash Flow Statements: Investing Activities
Cash Flow Statements: Financing Activities
Operating Cash Flows: Choice of Method
- Operating cash flows may be reported using one of two methods (para 18):
- Direct method:
o Major classes of gross cash receipts and payments are disclosed.
o Para 19 encourages this method. We will use this method!
- Indirect method:
o profit or loss is adjusted for the effects of transactions of a non-cash nature,
deferrals or accruals etc).
o Determine net cash flows from operating activities by adjusting profit or loss for
effects of
o Changes in inventories and operating receivables and payables
o Non-cash items (e.g. depreciation, provisions etc)
o All other items for which cash effects are investing or financing cash flows
Cash Flow Statements: Preparation
- Cash flow is NOT prepared from the general ledger trial balance
o Unlike balance sheets and income statements
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Document Summary
80% of small businesses fail within the first three years. The top reason for failure is cash flow problems. Cash flo(cid:449)s: (cid:862)i(cid:374)flo(cid:449)s a(cid:374)d outflo(cid:449)s of (cid:272)ash a(cid:374)d (cid:272)ash e(cid:395)ui(cid:448)ale(cid:374)ts(cid:863) (cid:894)pa(cid:396)a 6(cid:895) Cash: on hand (notes and coins held) and demand deposits (deposits on call with financial institutions) Cash equivalents: (cid:862)sho(cid:396)t-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to a(cid:374) i(cid:374)sig(cid:374)ifi(cid:272)a(cid:374)t (cid:396)isk of (cid:272)ha(cid:374)ges i(cid:374) (cid:448)alue(cid:863) (cid:894)pa(cid:396)a 6(cid:895) Operating cash flows may be reported using one of two methods (para 18): Direct method: major classes of gross cash receipts and payments are disclosed, para 19 encourages this method. Cash flow is not prepared from the general ledger trial balance: unlike balance sheets and income statements. Comparative balance sheets are often used, with supplementary information from the income statement and specific general ledger transactions.
