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CASH FLOW

Ms Rosmin Iqbal Hussain

BOptom (UKM), CMBA (UNIMAS)

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The Statement of Cash Flows

One of the three basic objectives of financialreporting is

assessing the amounts, timing, anduncertainty of cash flows.

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Purpose of the StatementTo provide relevant information about the cash

receipts and cash payments of an enterprise

during a period.The statement provides answers to the following

questions:

1. Where did the cash come from?

2. What was the cash used for?

3. What was the change in the cash balance?

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Need for Cash Flow Statement

To ensure: That sufficient profits are made to

finance the business activities

Sufficient cash funds are available asand when needed

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Content and FormatThree different activities:

Operating, Investing, Financing

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Content and FormatOperating

Cash inflowsand outflowsfromoperations.

Investing

Cash inflowsand outflowsfromnon-currentassets.

Financing

Cash inflowsand outflowsfromnon-currentliabilities andequity.

The statements value is that it helps users evaluateliquidity, solvency, and financial flexibility.

What does +ve / -ve value in each indicate?

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Standard Layout of the Cash

Flow Statement

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PreparationInformation obtained from several sources:

(1)comparative balance sheets,

(2)the current income statement, and

(3)selected transaction data (e.g bank acct)

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Where from: Where to?

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Statement of Cash FlowCash flow from Ct (acct receivables) 1070,000 OCash pd to supplier (acct payables)/

employees (expenses)

980,000 O

Tax paid 10,000 O

Purchase of equipment 8,000 I

Proceeds from notes payables 20,000 F

Dividends paid 5,000 F

Interest paid 10,000 F

Cash balance beginning of the year

(bank opening balance in the beginning

of the month)

63,000

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Statement Of Cash Flow for the year ended 31 December 20X6

Cash Flow from Operating ActivityCash from customer

Cash paid to supplier/employees

Tax paid

Cash Flow from operating activities

Cash Flow from Investing Activity

Purchase of equipmentCash Flow from Financing Activity

Proceeds from notes payables

Dividends paid

Interest paid

Cash Flow from financing activities

Nett Increase in cash & cash equivalentCash & cash equivalents at beginning of the year

Cash & cash equivalents at end of the year

Bank balances and cash

1070,000

(980,00)

(10,000)

80,000

(8,000)

20,000

(5,000)

(10,000)

5,000

77,00063,000

140,000

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ReviewIn preparing a statement of cash flows, which of the

following transactions would be considered an investing

activity?a. Sale of equipment at book value

b. Sale of merchandise (product) on credit

c. Declaration of a cash dividend

d. Issuance of bonds payable at a discount receivable

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Usefulness of the

Statement of Cash Flows

High amount- company able to generate

sufficient cash to pay its bills.

Low amount- company may have to borrow orissue equity securities to pay bills

Without cash, a company will not survive.

Cash flow from Operations:

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Usefulness of the

Statement of Cash Flows

Ratio indicates whether the company can pay off itscurrent liabilities from its operations. A ratio near1:1 is good.

Financial Liquidity

Net Cash Provided byOperating Activities

Average Current Liabilities

Current CashDebt Coverage

Ratio=

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Usefulness of the

Statement of Cash Flows

The amount of discretionary cash flow a company has& thus is able to use it for purchasing additionalinvestments, retiring its debt, purchasing treasurystock, or simply adding to its liquidity

Free Cash Flow

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ReviewThe current cash debt coverage ratio is often used toassess

a. financial flexibility.b. liquidity.

c. profitability.

d. solvency.