chapter 11 statements of cash flows clc
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Principle of Accounting
Chapter 11
Statements of Cash Flows
BA. in International BusinessForeign Trade University
Outline
The role of the statement of cash flows
Classification of cash flowsThe concept of cashThe format of the statement of cash
flowsPreparing a statement of cash flowsCash flows and decision making
The role of the statement of cash flows
The statement of cash flows concentrates on movements of cash in and out of the business entity.
It provides information relating to areas:The net cash inflows generated by trading
operationsThe firm’s ability to meet obligations to
creditors and bankersThe firm’s long-term capital and debt
arrangementsCash flows resulting from investing
activities.
Classification of cash flowsOperating activities examine the
cash flows resulting from revenues and expenses.
Investing and financing activities highlight the changes in items reported in the statement of financial position.
Operating activitiesCash inflows
Cash salesReceipts from customers
Cash outflowsPayments to suppliersPayments to employeesPayments for operating expensesPayments for taxPayments for interest
Investing activitiesCash inflows
Sale of non-current assetsSale of investments
Cash outflowsPurchase of non-current assetsPurchase of investments
Financing activitiesCash inflows
Cash contribution by ownerProceeds from loan
Cash outflowsCash drawings by ownerRepayment of loan (principal)
Examples of cash flows by classification
Activity Examples Effect on cash
Related B/S a/c
Operating Collection from customers Inflow Debtors
Payment to suppliers Outflow Creditors
Payment of wages Outflow Wages payable
Investing Purchase of non-current assets Outflow Plant, equipment
Sales of non-current assets Inflow Plant, equipment
Financing Capital contributions of cash Inflow Capital
Withdrawal of cash by owner Outflow Drawings
Taking out loans Inflow Loan payable
Loan repayments Outflow Loan payable
The concept of cashCash includes all cash on hand and any
other cash equivalents held by a firm.The definition of cash means cash on hand,
cash at bank and cash held with non-banking financial institutions on an at-call basis.
Cash equivalents extends this definition to include items such as short-term cash deposits, bills receivable and other short-term investments (bank bills, treasury bills).
Short-term investments can include investments with a maturity ranging from at-call up to two or three months.
Overdrafts should also be included under the definition of cash and cash equivalents.
The format of the statement of cash flows
Grech’s Sports Store: Statement of cash flows for year ended 31.12.05
Cash flows from operating activities
Receipts from customers 100,000
Payments to suppliers and employees (73,000)
Net cash provided by operating activities 27,000
Cash flows from investing activities
Proceeds from sale of shop fittings 1000
Payments for shop fittings (5,000)
Net cash used in investing activities (4,000)
The format of the statement of cash flows (cont’d)
Cash flows from financing activities
Loan from bank 10,000
Repayments of loan (5,000)
A. Grech – cash withdrawals (29,500)
Net cash used in financing activities (24,500)
Net increase (decrease) in cash held (1,500)
Cash held at the beginning of the year 2,000
Cash held at the end of the year 500
Preparing a statement of cash flows
A statement of cash flows can be prepared from either the two cash journals or a statement of receipts and payments.
Both journals and the statement of receipts and payments provide a summary of all cash flow transactions for the period.
Cash flows are classified under the heading operating, investing and financing.
Cash flows and decision making
The statement of cash flows provides management with information that demonstrates the effects of its decision-making on the cash resources of the firm.
A statement of cash flows can be compared with previous result, therefore statement of cash flows for consecutive periods are often prepared.
This allows for easy comparison and highlights changes in various activities and identifies trends.
Practice questionsExercise 11.1Exercise 11.2Exercise 11.3
HomeworkExercise 11.4Exercise 11.5Exercise 11.6Exercise 11.7
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