6 chpt 5&6
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.1
Drs. E. J. Galama
LEARNING OUTCOMES
You should be able to
explain the nature of the cash flow statement and
discuss how it can be helpful in identifying cash
flow problems;
discuss the crucial importance of cash
to a business;
interpret a cash flow statement.
prepare a cash flow statement;
Chapter 5 Measuring and reporting cash flows
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.2
Drs. E. J. Galama
A definition of cash and cash equivalents (IAS 7)
Notes and coins in hand,
and deposits in banks and
similar institutions that areaccessible on demand
Short-term, highly liquid
investments that are
readily convertible to
known amounts of cash
Cash
Cash equivalents
Definitions:
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.3
Drs. E. J. Galama
The relationship between the balance sheet, the
income statement and the cash flow statement
Balance sheet
at the start of
the accounting
period
Owners
claim
Cash andcash
equivalents
Cash flow
statement
Income statement
Balance sheet
at the end of
the accounting
period
Owners
claim
Cash andcash
equivalents
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.4
Drs. E. J. Galama
Standard layout of the cash flow statement
equals
plus or
minus
Net increase (or decrease) in
cash and cash equivalents over
the period
Cash flow
from operating activities
Cash flow
from investing activities
Cash flow
from financing activities
plus or
minus
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.5
Drs. E. J. Galama
Diagrammatical representation of the cash flow
statement
Investing
activities
Cash and
cash
equivalent
balances
Financingactivities
Operating
activities
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.6
Drs. E. J. Galama
Tesco plcSummarised cash flow statement for the year ended 24 February 2007
m
Net cash inflow from operating activities 2,611
Net cash used in investing activities (2,343)
Net cash used in financing activities (533)
Net (decrease)/increase in cash and cash equivalents (265)
Cash and cash equivalents at beginning of year 1,325
Effects of foreign exchange rate changes* (18)
Cash and cash equivalents at end of period 1,042
*This adjustmentis required because transactions are undertaken
by the company in different currencies and movements in
exchange rates can lead to gains or losses arising.
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Slide 5.7
Drs. E. J. Galama
Deducing net cash inflows from operating activities
There are two methods
that can be used such as:
The direct method
The indirect method
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Slide 5.8
Drs. E. J. Galama
The indirect method of deducing the net cash flowsfrom the operating activities
Net cash flows from operating activities
Interest expense
Increase (minus) or decrease (plus) in
inventories
Interest paid
Taxation paid
Dividend paid
plusDepreciation expense
Increase (minus) or decrease (plus) in
receivables
Increase (plus) or decrease (minus) in
payables
Net profit before taxation
plus
plus or minus
less
equals
plus or minus
plus or minus
less
less
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Slide 5.9
Drs. E. J. Galama
Cash flows from operating activities
Profit before taxation (after interest)
193
Adjustments for:
Depreciation 79
Interest receivable (17)
Interest payable
Increase in trade receivables
23
(18)
Decrease in trade payables (1)
Decrease in inventories 3
Cash generated from operations 262
Interest paid (23)
Taxation paid (39)Dividend paid (50)
Example 5.3 Torbryan plc Cash flow statement for the year ended 31 December 2008
m
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.10
Drs. E. J. Galama
Example 5.3 Torbryan plc(Continued) Cash flow statement for the year ended 31 December 2008
12
(68)(56)
(60)
90
(150)
(78)
(95)
17
150Net cash from operating activities
Cash flows from investing activities
Payments to acquire tangible non-current assets
Interest received
Net cash used in investing activities
Cash flows from financing activities
Repayments of loan notes
Issue of ordinary shares
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 January 2008Cash and cash equivalents at 31 December 2008
m
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.11
Drs. E. J. Galama
m
Overdraft balance at 1 January 2008 (68)
Net cash inflow 12
Overdraft balance at 31 December 2008 (56)
Example 5.3 Torbryan plc(Continued)
Analysis of cash and cash equivalents during the year ended 31 December 2008
Slid 5 12
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.12
Drs. E. J. Galama
LEARNING OUTCOMES
You should be able to
calculate important ratios for accessing the financial
performance and position of a business;
identify the major categories of ratios
that can be used for analysis purposes;
discuss the limitations of ratios as a tool of
financial analysis.
explain the significance of the ratios calculated;
Chapter 6 Analysing and interpreting financial statements
Slid 5 13
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.13
Drs. E. J. Galama
Financial ratio classifications
Categories
Profitability
Efficiency
Liquidity
Financial gearing
Investment.
Slide 5 14
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.14
Drs. E. J. Galama
Business
organisation
Competitors
Lenders
Managers
Owners Customers
Suppliers Investment
analysis
Community
representatives
Government
Employeesand their
representatives
Main users of financial information
Slide 5 15
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.15
Drs. E. J. Galama
similar businesses during
the same period
planned performance.
past periods
Ratios may be compared withthe following:
Ratio benchmarks
Slide 5 16
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.16
Drs. E. J. Galama
Profitability ratios
Profit for the year (net profit) any preference dividendOrdinary share capital + Reserves
Return on ordinary shareholders funds
Operating profitShare capital + Reserves + Non-current liabilities
Operating profit
Sales revenue
Operating profit margin
Return on capital employed
Gross profit
Sales revenue
Gross profit margin
x 100
x 100
x 100
x 100
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Slide 5 18
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.18
Drs. E. J. Galama
The main elements comprising the ROCE ratio
multiplied
by
equals
Return on capital employed
Sales revenue
Long-term capital employed
Operating profitSales revenue
Slide 5.19
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.19
Drs. E. J. Galama
Liquidity ratios
Current ratio
Acid test ratio
Formula:
Current assetsCurrent liabilities
Current assets (excluding inventories)
Current liabilities
=
=
Slide 5.20
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008
Slide 5.20
Drs. E. J. Galama
Gearing ratios
Long-term (non-current) liabilities
Share capital + Reserves + Long-term (non-current) liabilities
Gearing
ratio
Formula:
Interest cover
ratio
Operating profit
Interest payable
x 100
=
=
Slide 5.21
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. E. J. Galama
The effect of financial gearing
Operating profit
Returns
to ordinary
shareholders
Slide 5.22
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. E. J. Galama
The effect of financial gearing at Tesco plc (2000 2007)
Interest cover
(times)
ROSF (%)
ROCE (%)
2000 200320022001 2004 2005 2006
%/times
8
10
12
14
16
18
20
22
24
26
2007
0
Slide 5.23
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. E. J. Galama
Investment ratios
Formula
Dividend payout
ratio
Dividend yield
ratio
Earnings per
share
Price/earnings
ratio (P/E)
Dividends announced for the year
Profit for the year
Dividend per share/(1 t)
Market value per share
Profit for the year
Number of ordinary shares in issue
Market value per share
Earnings per share
x 100
x 100
=
=
=
=
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Slide 5.25
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. E. J. Galama
Average price/earnings ratios for businesses
in a range of industries
Source: Constructed from data appearing in the Financial Times, 6 October 2007
0
5
10
30
25
20
15
Oiland
ga
s
Construction
andmaterials
Chemic
als
Industr
ial
engineering
Pharma
ceuticals
andbio
technology
Tobacc
o
Foodand
drug
retailer
s
Electric
ity
Lifeins
urance
Travelandleisure
Media
Banks
11.67
18.00
25.68
18.15
14.65
17.63
19.8220.42
13.59
9.81
12.1913.09
Averag
efo
rallSE
listedb
usi n
esses
12.87
%
Slide 5.26
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Peter Atrill and Eddie McLaney,Accounting and Finance for Non-Specialists, 6th Edition, Pearson Education Limited 2008Drs. E. J. Galama
Graph plotting current ratio against time
Curren
tratio
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
2000 200320022001 2004
Tesco plc
J. Sainsbury plc
William Morrison plc
2005 2006
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