Reconciliation Statement for Cashflow

Maria Registered Posts: 7 New contributor 🐸
Hi there

Can anyone please help me try to understand this!!! :confused1:

I just cannot seem to grasp when completing a reconciliation of profit from operations for your cash flow statement when and why you actually deduct for example an increase in trade receivables and add a decrease in inventories???

Please help.




  • Marg22
    Marg22 Registered Posts: 84 Regular contributor ⭐

    I think you need to focus on the effect that all the transactions have on cash whether they reduce or increase it.

    For a cash flow statement start off with:-

    Profit from operations

    Add and deduct in accordance with whether it increases or reduces cash.

    Add depreciation because it is an expense and was deducted off profit from operations.

    Deduct a gain on disposal, because this was added into profit from operations and it is not actually anthing to do with cash.

    Add loss on disposal, because this was deducted and you need to reverse it.

    An increase in trade receivable means that we have not received as much money in so deduct it.

    Decrease in inventories means not as much money has been paid out for stock, so the effect is to increase cash. Closing stock is deducted off the income statement so that is why we have to adjust for it separately.

    Hope this helps.

  • blobbyh
    blobbyh Registered Posts: 2,415 Beyond epic contributor 🧙‍♂️
    This is a quirky analogy so please forgive me in advance!

    You're a car mechanic and today have done two things;

    1) Carried out work for your mate for £100 and told them that instead of paying you now, they can pay in two weeks time when their wages come through

    2) You've decided to stop smoking

    Now we'll skip one week forward and see how the two scenarios have affected our cash flow position at that moment in time;

    1) Whereas you should have had that £100 for the work you did, because you essentially offered credit to your friend you've reduced the cash in your pocket i.e. an increase in debtors reduces the liquid availability of cash.

    2) Since you stopped smoking, over the course of the week you've bought fewer cigarettes, spent less fag money and therefore got more in your pocket than you normally would i.e. a decrease in stocks increases the liquid availability of cash .

    Maybe an over-simple explanation I know but hope it helps!
  • George Tse
    George Tse Registered Posts: 241 Dedicated contributor 🦉
    ill give you the proforma this is profits before tax which i use

    Profits before Tax
    Adjustments for:
    (Profit)/Loss on disposal of property, plant and equipment
    (Increase)/Decrease in Inventories
    (Increase)/Decrease in Trade and other Receivables
    Increase/(Decrease) in Trade and other Payables
    Cash generated from operations
    Less Tax Paid
    Net cashflow from operating activities

    First of all if you do you working for your balance sheet for the 2 years e.g. 2008 minus 2007 for all the headings under Non- current assets, current assets, current liabilities, non current liabilities and equity.

    Do this as a working one year take away the other and total it al up and the total shud come to "0" then pick out the figures and put it in the reconcillated cash flow.

    I hope this makes sence lol

    Gentle Jesus
Privacy Policy