Download - Derived Cash Flow

Unit 3

Derived Cash Flow Statements

Derived Cash Flow Statement

Typical accounting systems work on an “accruals” rather than a “cash” basis

For example, revenue is logged when the work is done (products delivered etc) NOT when the cash is received


Typical accounting systems work on an “accruals” rather than a “cash” basis

For example, revenue is logged when the work is done (products delivered etc) NOT when the cash is received

So accounting systems do not cope well with producing cash flow statements

A derived cash flow statement is one arrived at using the company’s profit and loss account and its opening and closing balance sheets.


Start End of year

Fixed assets 1,000 1,500

Debtors (receivables) 500 425

Stocks (inventories) 300 325

Cash 25 75

Other current assets 100 125

Creditors (payables)<12m (350) (400)

Borrowings (750) (1,000)

Net assets 825 1,050

Share capital 500 550

Retained profits 325 500

825 1,050


Start End of year




Cash 25 75







825 1,050

The cash flow statement maps the opening cash figure to the closing one.


Start End of year




Cash 25 75







825 1,050

The cash flow statement maps the opening cash figure to the closing one.

As the balance sheet has to balance we can show the movement of cash by explaining the movements of everything else and picking out those caused by cash.


Start End of year

Cash 25 75

Fixed assets (1,000) (1,500)

Debtors (receivables) ( 500) (425)

Stocks (inventories) (300) (325)

Other current assets (100) (125)

Creditors (payables)<12m 350 400

Borrowings 750 1,000



25 75


Start End of year

Cash 25 75

Fixed assets (1,000) (1,500)

Debtors (receivables) ( 500) (425)

Stocks (inventories) (300) (325)

Other current assets (100) (125)

Creditors (payables)<12m 350 400

Borrowings 750 1,000



25 75

Explain this movement

By explaining each of these movements

Derived Cash Flow

We will need some extra information (this is all on the sheet posted to the TGF)

1 Summarised profit and loss account

Sales 10,000

Cost of sales 3,500

Operating costs 1,250

Operating profit 5,250

Interest 2,000

Tax 1,500

Net profit (earnings) 1,750

Dividends 1,575

Retained profits 175

2 Fixed assets were purchased for an unknown amount. A depreciation charge of £250 is included in the above p&l

3 There was a bad debt write down of £100 in the above figures

4 New loans were taken out amounting to £250 and new shares were issued for £50.

Derived Cash Flow

Opening cash balance 25

Closing cash balance 75

Cash inflow for the year 50

Lets start with the easy bit - what is the cash flow? The rest of the statement has to explain this figure.

Operating profit

By convention we start with the operating profit.

This is £5,250.

But we know that some of the items were not related to cash:

Operating profit

By convention we start with the operating profit.

This is £5,250.

But we know that some of the items were not related to cash:

Specifically: Depreciation £250 and bad debt write off £100

So we adjust the operating profit by adding back these deductions

Adjusted operating profit 5,250 + 250 + 100 = £5,600

Derived Cash Flow




Adjusted operating profit 5,600

Working capital movements

Next we calculate the cash flow effects of the movements in working capital.

The working capital items are:

Start End






Start End


Some of the debtors have been written off. So we know that part of the movement is “non-cash”.


Start End



So, let us adjust the starting debtors by the write down.

Start End

Debtors (receivables) 500 – 100 = 400 425

So, has there been a positive or adverse cash flow relating to debtors?


Start End



So, let us adjust the starting debtors by the write down.

Start End

Debtors (receivables) 500 – 100 = 400 425

So, has there been a positive or adverse cash flow relating to debtors?

As debtors have increased, this is adverse: our customers are paying more slowly.

So we put (25) on the cash flow.


Start End




Let us consider the other working capital items.

Stocks have increased – good or bad for cash flow?

Creditors have gone up – good or bad for cash flow?


Start End







Stocks increasing is bad for cash flow (25)

Creditors increasing in good for cash flow +50

What about other current assets?


Start End







Stocks increasing is bad for cash flow (25)

Creditors increasing in good for cash flow +50

What about other current assets?

Now we can conclude from debtors and stocks that an increase in working capital assets is adverse, so we treat this increase as (25)

Working capital movement

Start End of year

Movement

Debtors (receivables) 500 425 50-100 = -25

Stocks (inventories) 300 325 -25

Other current assets 100 125 -25

Creditors (payables)<12m (350) (400) 50

Derived Cash Flow





Movements in working capital

Debtors (25)

Stocks (25)

Creditors 50

Other current assets (25)

Cash from operations 5,575

Fixed Assets movement

Let us now look at other movements on the balance sheet.

Start End of year


We need to explain the £500 movement.



Start End of year



Opening fixed assets 1,000

Additions (cash) x

Depreciation (250)

Closing fixed assets 1,500



Start End of year



Opening fixed assets 1,000

Additions (cash) x

Depreciation (250)

Closing fixed assets 1,500

So the additions must be £750. This is cash spent and is called “capital expenditure” or “capex”.

Derived cash flow, so far






Debtors (25)

Stocks (25)


Creditors 50

Operating cash flow 5,575

Capital expenditure (750)

Borrowings and share capital

The next item on the balance sheet to explain is the movement in borrowings.

Start End


So the company must have borrowed £250 and nothing else happened.

Borrowings and share capital

The next item on the balance sheet to explain is the movement in borrowings.

Start End


So the company must have borrowed £250 and nothing else happened.

Similarly with the share capital


Shares must have been issued to a value of £50.

Derived cash flow, so far






Debtors (25)

Stocks (25)


Creditors 50



New borrowings 250

Share issue 50

Retained profits

Next is the movement in retained profits.

Start End


The £175 is the retained profit on the profit and loss account. But we have only accounted for the operating profit. We must therefore look at the items below that:

Retained profits

Next is the movement in retained profits.


The £175 is the retained profit on the profit and loss account. But we have only accounted for the operating profit. We must therefore look at the items below that:

Interest 2,000

Tax 1,500

Dividend 1,575

If any of these were not paid then they would be included in creditors, which we have already adjusted for. So we now can simply put these figures straight into our cash flow.

Derived cash flow complete






Debtors (25)

Stocks (25)


Creditors 50



New borrowings 250

Share issue 50

Interest paid (2,000)

Tax paid (1,500)

Dividends paid (1,575)

Cash flow 50

I will put an excel spreadsheet with this example on the TGF

Next Time

We shall look at Portfolio Theory and CAPM from unit 4

Download - Derived Cash Flow

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