BSB110 Lecture Notes - Lecture 9: Cash Flow Statement, Cash Cash, Cash Flow
Week 9 Accounting Lecture Notes
Cash- Part 2
The Statement of Cash Flows: Purpose and Format
• To provide information about:
o cash receipts
o cash payments
o net change in cash resulting from operating, investing and financing
activities.
• To reconcile the beginning and ending cash balances.
• The statement of cash flows provides answers as to:
o Where did the cash come from during the period?
o What was the cash used for during the period?
o What was the change in the cash balance during the period?
o Is the entity generating sufficient cash flows from operations to meet cash
requirements?
Importance of Cash Flow Statement
• Provides vital information about cash in and cash out
• Vital information to use with the Income Statement and Balance Sheet
• Must be able to manage cash to survive, otherwise business will fail (eg. ABC
Learning)
• Cash pays the ills, profit does’t!
Classification of Cash Flows
• Operating activities:
o Etity’s priipal ash reveue-generating activities, and activities not
regarded as investing or financing activities (day-to-day cash business
transactions).
• Investing activities:
o Acquisition and disposal of long-term assets (Non-current assets) affecting
cash.
• Financing activities:
o Affect the size and composition of contributed equity and borrowing (Debt
and Equity) impacting cash.
Significant Non-Cash Activities
• Significant financing and investing activities that do not affect cash are not reported
in the body of the statement of cash flows, but are reported in the notes.
• These include:
o Issue of shares to purchase assets.
o Conversion of debt into ordinary shares.
o Issue of debt to purchase assets.
o Exchanges of property, plant & equipment.
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Format of Cash Flow Statement
• Operating activities are reported using two methods: direct and indirect.
• These methods differ in the way that net cash provided (used) by operating activities
is calculated.
• AASB 107 encourage companies to use the direct method for published financial
statements.
• AASB 107 requires the indirect method by way of a note as a reconciliation.
• The direct method presents cash payments as deductions from cash receipts to
determine net cash provided (used) by operating activities.
o We will be using this method
• The indirect method starts from net profit after tax and adjusts this by changes in
non-cash items affecting net profit to determine net cash provided (used) by
operating activities.
o We will not be using this method
• Shows the three categories of cash flows and totals
• Inflows of cash are positive numbers
• Outflows of cash are negative numbers (must be displayed using brackets)
• Shows overall cash movement by comparing this period’s balance with last
period’s balance
• Total of the three categories of cash flow must equal cash movement for the
period
Usefulness of Cash Flow Statement
• Helps investors, creditors and other interested parties to evaluate the following
about the entity:
o Ability to generate future cash flows.
o Ability to pay dividends and meet obligations.
o Reasons for difference between profit and net cash provided (used) by
operating activities.
o Cash investing and financing transactions for the period.
Preparing the Cash Flow Statement
• Direct inspection of the cash receipts and cash payments journals.
o Only suitable for small entities
• Using the Statement of Profit and Loss and the Statement of Financial Position
account balances to determine inflows and outflows of cash
o Most commonly used
o This is the method we will be using
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Preparing the Cash Flow Statement using the Financial Statements
• There are three sources of information
1. Statement of financial position:
o Comparative for this period and last period
2. Curret period’s Stateet of Profit or Loss.
3. Additional information about transactions that occurred during the period that
are not shown on the Statements
• Internal reports are used to prepare the Cash Flow Statement.
Steps to Prepare a Cash Flow Statement: Using Financial Statements
There are four steps in the preparation:
Step 1: Determining the net increase (decrease) in Cash for the period
• The difference between the beginning and ending cash balances can be easily
calculated using the comparative Statement of Financial Position data.
• Reports opening cash balance compared to closing balance and we can use these to
find the difference.
• Calculate movement in balance over the year.
• Example:
o Pacific Ltd.'s cash increased by $32 000:
o This is entered at the bottom of the Cash Flow Statement
Step 2: Determining net cash provided or (used) by Operating Activities
• This step ivolves aalysig ot oly the urret year’s Statement of Profit or Loss
but also comparative Statement of
Financial Position information and
selected additional data.
• Aims to adjust activities reported in
the Statement of Profit or Loss from
accrual to cash basis.
• Remember some activities are non-
cash and are not included (e.g.
depreciation, loss or gain on sale of
assets, bad debts expense).
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