Cash Flow Statements

Cash flow statement may provide considerable information about what is really happening in

a business beyond that contained in either the income statement or the balance sheet.

Analysing this statement should not present an intimidating task; instead it will quickly

become obvious that the benefits of understanding the sources and uses of a company’s cash

far outweigh the costs of undertaking some very straightforward analyses.

Who cares about a Cash Flow Statement?

• Management may want to know if the cash generated by the company will be sufficient

to fund their expansion strategy

• Shareholders may want to know if the firm is generating enough cash to pay dividends

• Suppliers want to know if their customers will be able to pay if offered credit

Investors want to evaluate future growth potential

• Employees are interested in the overall viability of their employer as indicated by its

ability to fund its operations

Reasons why companies prepare a cash flow statements

To show the future cash inflows and outflows To help predict future cash flows To assist with financial planning To assist in assessing the liquidity of the business To show that profits does not always equal cash To comply with legal requirements

Aims:

Students will be able to prepare a Cashflow statement Reconcile operating profit to net cash flow from operating activities Reconcile movement in cash to movement in net debt Explain why profit does not always equal cash

Rules for reconciling operating profit to net Cashflow from operating activities

Depreciation –does not affect cash flow always ADD

Increase in Debtors Outflow=SUBTRACT

Decrease in Creditors Outflow=SUBTRACT

Increase in Stocks Outflow=SUBTRACT

Decrease in Debtors Inflows= ADD

Increase in Creditors Inflows=ADD

Decrease in Stocks Inflows= ADD

Cash flow Statement explain the difference between cash balances at the beginning of the year and cash balances at the end of the year

Financial Reporting Standard 1 outlines how cash flow statements must be presented, and the layout of the statement and the two reconciliation notes with it must be done in accordance with the FRS1.

1. Reconciliation of Operating Profit to Net Cash Flow from Operating Activities

Cash flow is derived from the operating activities of the business/firm and Operating profit is adjusted for changes in; Stock, Debtors, Creditors, Non-Cash Items.

Non-Cash items do not cause on inflow/outflow of cash but do affect net profit.

Examples include depreciation, profit/loss on disposal of assets, changes in provision for bad debts, writing off of patents.

Reconciliation of Operating Profit to Net Cash Flow from Operating Activities

€ €

Operating Profit

Add Depreciation

Less Profit on disposal of Fixed Assets (Add loss on disposal)

Add decrease in Stock(Less increase in Stock)

Add decrease in Debtors(Less increase in Debtors)

Less decrease in Creditors (Add increase in Creditors)

Add Increase in Bad Debt Provision(Less decrease in BDP)

Add Patents written off

Net Cash Flow from Operating Activities xxxxxx

Cash Flow Statement

It is very important that students learn the layout and know the headings and the inflows/outflows that appear under each heading. In exams marks may be awarded for the headings only if they are laid out in the prescribed format as below

Cashflow forecast of XYZ Ltd for the y/e 31/12/20XX

€ €

Operating Activities

Net Cashflow from operating activities

Return on Investment & Servicing of Finance

Interest Received Interest paid Preference dividend paid Dividends Received

Taxation Taxation Paid

Capital Expenditure & Financial Investment Payment to acquire fixed assets Receipts from sale of fixed assets Payments to acquire investments Receipts from sale of investments

Equity dividend paid Ordinary dividends paid

= Net cash inflow before liquid resources and financing

Management of Liquid Resources Purchase of Govt securities Sale of Govt securities Payment into Current Asset investments/short-term deposits Withdrawal from Current Asset investments/short-term deposits

Financing Receipts from the issue of shares Receipts from share premium Repayment of Debentures/loans Receipts from issue of Debentures/loans

= Increase /Decrease in Cash

Reconciliation of movement in Cash to movement in Net Debt

€ €

Increase/Decrease in cash

Cash used to increase liquid resources (withdrawals from liquid resources)

Cash used to repay debentures (Receipt from issue of new debentures/loans)

Change in Net debt

Net debt at 1/1/20XX

Net debt at 31/12/20XX

The Net debt is calculated by:

Total Borrowings (Debentures + Overdraft + other loans) minus Cash+Liquid Resources (Current asset investments)

Note that if the net debt turns out to be a positive calculation then it is referred to as Net Funds

Abridged Profit and Loss Account

In some Leaving Certificate examination questions students may be asked to prepare an abridged profit & loss account. The layout of this account is exactly the same as the profit & loss account. The approach to this question is to work backwards from the profit & loss balance given in the question. Put in the figures for dividends, taxation, interest, work back to the operating profit and then continue as normal with the reconciliation of the operating to net Cashflow from operating activities

Abridged Profit & Loss for the year ended 31/12/20XX

Operating Profit

Interest for the year

Profit before taxation

Taxation for the year

Profit after taxation

Dividends- Interim

-ProposedRetained profits for the yearRetained profits on 1/1/2009

Retained profits on 31/12/2009

Sample Leaving Certificate H/L Question

Solution and Marking Scheme

Cash flow statement questions can appear on the paper in Section 2 as 100 mark questions as above or Section 1 for 60 marks as below

60

Solution to 60mark Question

Profit does not equal cash because:Items affect cash but not profit

Amounts paid for fixed assets or amounts received from sale of fixed assets

Amounts paid into or withdrawn from the business by its owners

Items affect profit but not cash

Non-cash expenses/gains such as depreciation. profit on disposal of fixed asset, decrease in bad debt provision

Credit Sales and Credit Purchases

Key Points to remember when doing Cash flow Questions

Follow the three steps i.e. Prepare a reconciliation of operating profit to net cash flow from operating activities, the cash flow statement and a reconciliation of movement in cash to movement in net debt.

The layout and wording must followed exactly

Proof your answer by looking at the change in cash