ACCT10002 Chapter Notes - Chapter 11: Accrual, Free Cash Flow, Capital Expenditure
22 May 2018
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The main purpose of the statement of cash flows is to provide information about cash receipts, cash
payments and the net change in cash resulting from the operating, investing and financing activities of
an entity during a period of external users of financial information
Reported in a format that reconciles the beginning and ending cash balances
The statement of cash flows: purpose and format
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Positive cash flows are a good indicator that the operations of the business can generate sufficient
cash flows to maintain or expand the current level of operations, repay debt and pay dividends
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Operating activities are the entity's principal revenue
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generating activities (provision of goods and
services)
Cash outflows are an indicator that the entity has invested in non
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current assets that are intended
to generate income and cash flows available for future dividends to equity investors or expansion
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Investing activities are the acquisition and disposal of long
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term assets (purchasing and selling non
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current assets, lending money and collecting loans)
Cash inflows are useful in predicting future cash outflows in the form of interest to lenders
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Financing activities are those that affect the size and composition of contributed equity and borrowing
(obtaining cash from issuing debt, repaying the amounts borrowed, obtaining cash from shareholders
and paying them dividends or buying back shares
Interest received and dividends received may be operating or investing
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Dividends paid may be operating or financing
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Classification of certain items is debatable:
Issue of shares to purchase assets
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Conversion of debt into ordinary shares
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Issue of debt to purchase assets
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Exchanges of property, plant and equipment
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Significant non
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cash activities:
Cash receipts and payments may be determined by adjusting items in the statement of
profit or loss from the accrual basis to the cash basis
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More consistent with the objective of the statement of cash flows
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Direct method presents cash payments as deductions from cash receipts to determine 'Net cash
provided (used) by operating activities
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Indirect method starts with profit and adjusts it for timing differences, non
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cash items and any
investing or financing items included in profit to determine 'Net cash provided (used) by operating
activities)
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Two methods of presenting cash flows from operating activities
Both methods arrive at the same result, but differ in the disclosure of items on the face of the statement
of cash flows
Examining relationships between sales and net cash provided by operating activities
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Better predict amount, timing and uncertainty of future cash flows
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The entity's ability to generate future cash flows
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Must have cash to pay employees, settle debts, pay dividends
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The entity's ability to pay dividends and meet obligations
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Cash is included in the statement of cash flows regardless of whether it’s a prepayment or
revenue received in advance
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Management has little control over the receipts of cash
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The reasons for the difference between profit and net cash provided (used) by operating activities
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Better understand how assets and liabilities increased or decreased
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The cash investing and financing transactions during the period
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The statement of cash flows is useful in helping investors, creditors and others evaluate aspects of the
entity's financial positions
Classification of cash flows
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Document Summary
The statement of cash flows: purpose and format. Reported in a format that reconciles the beginning and ending cash balances. Operating activities are the entity"s principal revenue-generating activities (provision of goods and services) Positive cash flows are a good indicator that the operations of the business can generate sufficient cash flows to maintain or expand the current level of operations, repay debt and pay dividends. Investing activities are the acquisition and disposal of long-term assets (purchasing and selling non- current assets, lending money and collecting loans) Cash outflows are an indicator that the entity has invested in non-current assets that are intended to generate income and cash flows available for future dividends to equity investors or expansion. Financing activities are those that affect the size and composition of contributed equity and borrowing (obtaining cash from issuing debt, repaying the amounts borrowed, obtaining cash from shareholders and paying them dividends or buying back shares.
