Financial Statements - Cash Flow forecasts

James Patterson

Hi All,

I had college last night and after asking a few questions i still don't feel fully settled with what we did.

We have been using the Osbourne Books and looking at all the IAS's first and last night went onto the first Statement of Cash Flow.

I understand how to complete the statement itself breaking it down into the sections of: Adjustments, Investing and Financial Operating activities along with cash at the Start of the year/End of the year at the bottom.

The Indirect Method confuses me and the reconciliation wasn't overly clear. I'm aware than for example depreciate isn't monetary in the form of cash so this has to be accounted for along with inventories etc.

Its just not all glueing together as a process for me :confused1:

Any advise would be appreciated, as i am aware my question isn't clear.

Cheers

Clintm15

Hello James,

The main purpose of the SOCF is to show how 'Balance Sheet' changes affect the level of cash. So it's basically a measure of the Business's liquidity.

The operating activities segment shows how much actual cash flowed in or out of the Business. A Business could for example have a high amount of profit on the Income Statement for a particular year but not much cash flowing in because of a build up in inventory or an increase in sales made by way of credit and not cash. Similarly an increase in payables could increase the cash flowing in but maybe signify a problem with the company's policy of dealing with suppliers. On the other hand a Business could have low profit but significantly more cash coming in because the Income statement contained non-cash charges such as depreciation.

The investment activities section shows how much cash a Business spends on non-current assets. A shareholder might want to see how much cash is spent on capital expenditures and if those outlays are resulting in proportionate increases in cash, basically the managements effectiveness at maximizing asset efficiency. This section also shows the Businesses investments. It can be seen if the company is investing wisely and could include Shares in other companies, Bond purchases and other investing vehicles.

The Financing section is my favourite part. This shows how the company is financing itself. You can see if a Business is increasing it's debt. You can see if the dividends being paid and make some assumptions like if the Business is using debt to pay these dividends or if it is using free cash flow like it should. You can also see how many shares are being issued and interpret whether the company growing this way is appropriate or whether this might dilute the earnings per share too much.

The direct method is in line with cash accounting and literally just shows the cash inflows and outflows.

I hope this is helpful in some way and I'm happy to answer any further questions that you have.

James Patterson

Hi Clint,

Thankyou for that, very informative and its nice to see it written by someone rather than jargon in a book.

I understand the sections and structure of the statement and if given the contents can identify what goes where and actually complete it.

The main part i don't understand too well is the reconciliation and where the figures end everything comes from; is it simply that you pull the figures from the SoFP and SoCI in order to make the reconciliation? And you're literally just putting it in terms of cash e.g. Depreciation isn't cash, and doing the same in order to work out liquidity?

Clintm15

James Patterson wrote: »

Hi Clint,

Thankyou for that, very informative and its nice to see it written by someone rather than jargon in a book.

I understand the sections and structure of the statement and if given the contents can identify what goes where and actually complete it.

The main part i don't understand too well is the reconciliation and where the figures end everything comes from; is it simply that you pull the figures from the SoFP and SoCI in order to make the reconciliation? And you're literally just putting it in terms of cash e.g. Depreciation isn't cash, and doing the same in order to work out liquidity?

Most of the figures are pulled from the respective SoFP and SoCI. Some figures such as tax paid and interest paid are calculated. This is because the tax and interest charged to the SoCI is not necessarily what has been paid. To work out what has been paid you need to compare last years SoFP with the current SoFP and SoCI for example:

Interest Payable (last years SoFP) + Interest Charge (This years SoCI) - Interest Payable (This years SoFP) = Interest Paid

The total reconciliation for the SoCF is the balance of cash and equivalents from this year's and last year's SoFP.

So..

cash and equivalents (last years SoFP) +/- net change in cash (This years SoCF) = cash and equivalents (this years SoFP)

stevef

You are correct James, the indirect method is about analysing the movement between current SoFP and previous year SoFP between cash and non cash using all the other statements and information you have. And then dropping the results into the correct heading. In real life situations I also find that serious finger crossing, lots of praying and imaginative rounding also helps.

missm4ry4m

Hi James, when in your FNST exam?

Mines is tomorrow! Eeeek!

James Patterson

missm4ry4m wrote: »

Hi James, when in your FNST exam?

Mines is tomorrow! Eeeek!

Mine will probably be around December, so planned to ruin my Christmas haha I just figured i'd start early.

How did you think it went? (I've been away a few days, sorry for the late reply)