Cashflow

Webby

Can anybody help, I just can't get my head around Cashflows. When we went over the subject in college, I thought it was pretty straight foward but now when I try and work through the books on it I feel completely lost with it and its winding me up. Can anyone help maybe break it up for me to understand it easier and clearer.

Thanks

A-Vic

Know what you mean it looks a lot more complicated by the books in the same boat

Steve Collings

The statement of cash flows (to be IAS 1 'technically correct') shows how a company has generated and spent cash. This bypasses the IASB 'accruals concept' as this statement is prepared on a cash, rather than an accruals, basis.

A company will generate and spend cash by virtue of three activities:

Operating activities: these are the day to day revenue-producing activities.
Investing activities: these are the acquisition and disposal of things like non current assets.
Financing activities: these are things that raise cash such as share issues or new loans.

What you are doing is turning the operating profit and the statement of financial position of an entity for the current and prior year from an accruals concept into a cash concept. This is why we start with operating profit and strip out the non-cash transactions, such as depreciation (non cash), gains on disposal of property, plant and equipment (non cash) to arrive at operating cash flows.

We then have to reconcile the operating cash flows to cash generated by operations which involves dealing with movements in working capital such as increases (decreases) in trade receivables, payables and inventory. We 'add' to operating any cash INFLOWS such as increases in payables (because we have paid out less cash than the prior year), decreases in inventory are also added because the excess from the prior year has either turned into receivables or cash (think of the order of liquidity: inventory turns into receivables which turn into cash). Cash OUTFLOWS are 'deducted' from operating profit and these are such things like increases in inventory (we have spent more money on inventory so cash is tied up in inventory).

You may have to use an incomplete records approach to dealing with items such as PPE additions. Take the net book value of non current assets from the prior year, deduct depreciation charges, deduct the net book value of any assets disposed of in the year, enter the closing balance of this year's non current assets and the balancing figure to get the 'T' account to balance is the additions figure.

The most common workings needed which require an incomplete records approach for DFS are:

1. Proceeds from sale of assets
Take the NBV of assets sold, add the gain or (deduct) the loss on sale to arrive at the proceeds figure.

2. Purchases of Property, plant and equipment
See above.

3. Proceeds from share issue
Share premium + Share capital b/f less share premium + share capital c/f = proceeds received.

It is important that you understand what it is the statement of cash flows aims to do which will then help you understand which figures go where. I advise lots of exam standard questions in this area because this primary statement is often the one that students dislike because it is a 'techhie' one!

Best wishes

steve

A-Vic

Hi Steve sorry to be a pain anychance you could show us in an example?

Vic

Steve Collings

Hi A-Vic,

If I get chance later in the week I will post up a worked example with running commentary for you.

This website sometimes restricts the size of file attachments so depending on the size of the document I might either email it to students upon request or post it up on AccountancyStudents for download.

Kind regards
Steve

A-Vic

Steve Collings wrote: »

Hi A-Vic,

If I get chance later in the week I will post up a worked example with running commentary for you.

This website sometimes restricts the size of file attachments so depending on the size of the document I might either email it to students upon request or post it up on AccountancyStudents for download.

Kind regards
Steve

Great thanks steve


Ive also managed to find a great example in clairs standards book (Kaplin)

blobbyh

That Collings bloke is a bit of a legend, isn't he?! ;-)