BUSN1001 Study Guide - Final Guide: Cash Flow, Deferral, Accounts Payable
The Statement of Cash Flows
• The statement of cash flows provides some information that balance sheet and
income statement do not provide.
Cash and Cash Equivalents
• Cash - includes cash on hand; and demand deposits.
• Cash equivalents:
o Highly liquid investments - readily convertible to cash at the investor's option;
and used by entity in its cash management function on a day-to-day basis.
→ bank bills, non bank bills, money market deposits.
o Bank overdrafts - integral to the cash management functions; and not subject
to a term facility.
• Cash flows - are inflows and outflows of cash and cash equivalents.
• Net cash flows = cash inflows - cash outflows
Cash Flow from Operating Activities
• Operating activities relate to the provision of goods/services.
• Inflows - from sales of goods and services to customers, from receipt of interest on
loans or dividends on investments in stock.
• Outflows - to employees for wages, to suppliers for inventory, to others for expenses,
to creditors for interest, to government for taxes.
Cash Flow from Investing Activities
• Investing activities relate to the acquisition and disposal of non-current assets.
• Inflows - from sale of property, plant and equipment, from sale of shares held as
investments.
• Outflows - to purchase property, plant and equipment, to purchase shares and notes
for investment purposes.
Cash Flow from Financing Activities
• Financing activities relate to changing the size and composition of the financial
structure of the entity.
• Inflows - from issue of shares, from borrowings.
• Outflows - to buy back shares, to repay debt, to pay dividends.
Preparing a Statement of Cash Flows
• Read the textbook!
Step 0: Read the
information
• Expect information - two balance sheets, income statement,
notes on specific transactions.
Step 1: Cash
flow from
operating
activities
• Report the net of:
o Cash received from customers
o Cash paid to suppliers
o Cash paid for other expenses
• Direct methods - convert the accrual-based figures to a cash
basis for each of the item in an income statement.
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Document Summary
The statement of cash flows: the statement of cash flows provides some information that balance sheet and income statement do not provide. Cash flow from operating activities: operating activities relate to the provision of goods/services. Investing activities relate to the acquisition and disposal of non-current assets. Inflows - from sale of property, plant and equipment, from sale of shares held as investments: outflows - to purchase property, plant and equipment, to purchase shares and notes for investment purposes. Cash flow from financing activities: financing activities relate to changing the size and composition of the financial structure of the entity. Inflows - from issue of shares, from borrowings: outflows - to buy back shares, to repay debt, to pay dividends. Preparing a statement of cash flows: read the textbook! The direct and indirect methods give the same results. The only difference is in how they report cash flow from operations. Indirect method - convert profit to cash flow from operation.
