7/28/2009

1. Understand the primary purpose of a

statement of cash flows.
2. Illustrate the importance and usefulness of
cash flows information.
3. Differentiate between operating, investing
6th Presentation and financing activities.
4. Prepare a statement of cash flows using the
direct and indirect methods from statement
of financial position and statement of
comprehensive income and additional
information.

Problem Analysis

Shows how cash has been

generated and used by the business

How can
Fair
Dreamer Over a period of time
How to How to
How make
improve monitor
money has profits yet
cash cash
been spent cash
position movement
balance is An indication of liquidity
decreasing
?

The entity's ability to generate

future cash flows
The entity's ability to pay
dividends and meet obligations
The reasons for the difference
between net income and net
cash provided (used) by
operating activities

The investing and financing

transactions during the period

1
 7/28/2009

• How did cash increase when there was a net loss for the period?

• How can there be a negative cash flow when there is a net profit Time
for the period?

• How was the expansion in the machinery financed? Financial Financial

Position 1 Position 2
• Why were dividends not increased?
Statement of Comprehensive Income
• How was the repayment of loans accomplished? Statement of Cash Flows
Statement of Changes in Equity
• Is cash flow greater or lesser than net income?

• How much money was borrowed during the year?

5 aspects of cash flow are important:

1) Where is cash coming from (source) or where
• Comparative Financial is it going to (use), and why (purpose)?
Positions
2) How much is the cash inflow or outflow?
3) Is the cash flow recurring?
• Current year Statement of 4) When will the cash flow occur?
Comprehensive Income
5) Will the cash flow affect some other cash flow?

• Additional information

• Cash generated or used due to the

To classify by 3 activities ie. running of the business

operating
Operating • Internal ability of business to generate
cash

investing
Body of
Statement

financing • Cash generated or used through
financing activities
Non-cash investing and financing activities Financing • Usually bank loan or repayment or
equity injection
to be disclosed elsewhere in financial
statements
• Cash generated or used in investment
Investing • Purchase or liquidation (selling of fixed
assets)

2
 7/28/2009

Operations Collections from customers

Interest income
Source
Source
There are two methods to preparing the statement
Payments to suppliers Use of cash flows:
Payment of wages Use
Payment of rent Use
Payment of interest Use

Investing Purchase of building Use

Purchase of equipment Use
Investment in securities Use DIRECT INDIRECT
Sale of old equipment Source
Sale of investment securities Source

Financing Investment by owners Source

Loans from bank Source
Distribution of profits to owners eg.
Dividends Use
Repayment of loan Use

Gross cash receipts less gross cash payments =
The indirect method is used extensively in
Net cash provided by operating activities practice.

Most companies favour the indirect method for

Provides information which may be useful in the following reasons:
estimating future cash flows and which is not
available under the indirect method ◦ it is easier to prepare,
◦ it focuses on the differences between net income and
net cash flow from operating activities,
◦ it tends to reveal less company information to
competitors.

Profit before tax

Add: Non-cash expense e.g.
depreciation expense
Less: Non-cash income e.g.
unrealized gains
Add / (Less): Items related to
investing/financing cash flows
Operating cash flow before
working capital changes
The non-cash expense items reduce the profit before tax.
As such, this expense amount should be added back in
order to be able to calculate the actual cash used/received.

FRS 7 Para 18 allows the use of either method; Para 19
The non-cash income items increase the profit before tax. encourages the direct method
As such, this income should be subtracted in order to be
able to calculate the actual cash used/received.
Both methods arrive at the same total amount for “Net
Examples of such items: Interest expense, interest income, cash” provided by operating activities
etc. These items can be classified as investing, financing or
operating cash flow.

The methods differ in disclosing the items that make up the total
amount

Add/(Less): An increase in asset accounts usually means a reduction in
The choice of methods affects only the operating activities
Decrease/(Increase) in cash = Subtracted from Profit before Tax. section; the investing and financing activities sections are the
inventories/operating A decrease in asset accounts usually means an increase in
receivables cash = Added back to Profit before Tax.
same
Add/(Less): An increase in liability accounts usually means an increase
Ian should note that both methods will give the same cash
Increase/(Decrease)in in cash = Added back to Profit before tax.
operating payables An decrease in liability accounts usually means an position
decrease in cash = Subtracted from Profit before tax.
Cash generated from
operations

3
 7/28/2009

Why is the company making profit?

Main reason for company making profit is due to the

Application to problem significant sales made of $890k.

statement – Ian’s
However, how is the collection from the sales?

Collection from sales is not good as can be seen

concerns from the significant increase in accounts receivable
by $458k. This is one of the reasons why cash has
decreased given that the company is making profit.

Money collected from sales made / accounts receivable

has been used to pay suppliers and other operating
Ian’s concern is not a valid one, given that the
expenses. decrease in cash is supported by events that has
$ ‘000 happened.
Receipt from customers 432
Payment to suppliers (411)

However, Fair Dreamer would need to focus on how
they can improve in their accounts receivable
Payment for other operating expenses (197)
collection process.
(176)

Sales made should be collected promptly.

And the cash accumulated in prior year and proceed
from issuance of share have been used to repay the
loan and note payable as well as used to purchase
machinery in the current year.

Direct How to monitor

Statement cash
Operating of Cash
Activities Flows
How money is
spent
Cash
flow
Investing
Activities
Questions?
How to improve
cash flow
Financing
Indirect
Activities
Statement Did the
of Cash company really
Flows “make” cash

4
 7/28/2009

Websites

Council on Corporate Disclosure and Governance,
http://www.ccdg.gov.sg/frs/attachments/2004/FRS_1_2007.pdf, Retrieved on 22 May
2009.

Council on Corporate Disclosure and Governance,

http://www.icpas.org.sg/article_det.asp?articleid=723&ps=7, Retrieved on 22 May 2009.

My Own Business
http://www.myownbusiness.org/s7, Retrieved on 22 May 2009

Textbooks

King, Lembke, and Smith; Financial Accounting: A Decision-Making Approach, 2nd
Edition; John Wiley & Sons Inc.

Libby, Libby, and Short; Financial Accounting:6th Edition; McGraw-Hill International

Edition.