Upload
muhammad-bilal
View
232
Download
0
Embed Size (px)
Citation preview
8/11/2019 Cashflow Stmnt - HRB
1/27
Cashflow Statements - IAS 7 -- HR Bhullar
1
Cash flowstatements
P ROF . H AMAD R ASOOL B HULLAR FCMA FCIS FPA, M PHIL , M COM , CA ( INTER ), DCMA
8/11/2019 Cashflow Stmnt - HRB
2/27
Cash flow statement
Cashflow Statements - IAS 7 -- HR Bhullar
2
A cash flow statement, presents informationabout the cashflows associated with thecompanys main operations and those associated with its investing and financing activities of theperiod A cash flow statement functions in conjunction with both the income statement (performancedimension) and the balance sheet (financialposition)IAS 7 Cash Flow Statements provides guidlineon standard design n format of a cash flowstatement
8/11/2019 Cashflow Stmnt - HRB
3/27
Usefulness of cash flow information
Cashflow Statements - IAS 7 -- HR Bhullar
3
Ability to generate adequate cash flows is asignificant performance dimensionCash flow information clarifies the dynamics of
short-term liquidity and long-term solvencyCash flow information is an essential input foreconomic decision models
8/11/2019 Cashflow Stmnt - HRB
4/27
Concepts of Cash and Cash Equivalents
Cashflow Statements - IAS 7 -- HR Bhullar
4
Cash comprises cash on hand and demanddeposits with banks (including Bank Overdraft).Cash equivalents are short term, highly liquidinvestments that are readily convertible intoknown amounts of cash and which are subject toan insignificant risk of changes in value.Cash Equivalents are
Highly liquid investmentsHeld for meeting short term commitmentsReadily convertible into known amounts of cash
Having a very insignificant riskShort maturity (3 months maximum)Cash flows exclude
Movements between cash and cash equivalents
8/11/2019 Cashflow Stmnt - HRB
5/27
Businesses are like Fruit Trees
Cashflow Statements - IAS 7 -- HR Bhullar
5
Fruits & leaves = Operating Activities(Profits and Working capital)
Trunk & Branches = Investing Activities(Fixed Assets & Investments)
Roots = Financing Activities(Long term Loans, Bonds & Debentures
and Equity)
8/11/2019 Cashflow Stmnt - HRB
6/27
Operating Cash flow versus profits
Cashflow Statements - IAS 7 -- HR Bhullar
6
Operating Cash flow and profit are differenteconomic phenomena
But linked through the mechanisms of accrual accounting!
Cash flows are factual details of incoming andoutgoing flows of cash, while; Balance sheet and income statement emanate
from professional judgement and are not a directprojection of objective economic data
8/11/2019 Cashflow Stmnt - HRB
7/27
Liquidity/solvency and cash flows
Cashflow Statements - IAS 7 -- HR Bhullar
7
Liquidity- Relates to nearness to cash of the structure of assets- Determined by capacity to convert current assets into cash
Solvency- Relates to future availability of cash in order to settle financial
liabilities on due date- Determined by timing and uncertainty of expected future cash
payments and cash receipts
Liquidity and solvency ratios are determined onstatic financial position data, while cash flowsreflect changes in financial position
8/11/2019 Cashflow Stmnt - HRB
8/27
Format & structure of cash flow Statement
Cash flows from opera t ing activities
+ Cash flows from inves t ing activities
+ Cash flows from f inanc ing activities
Net change in cash during period
+ Beginning cash balance
Ending cash balance
8/11/2019 Cashflow Stmnt - HRB
9/27
Cash flows from operating activities
Cashflow Statements - IAS 7 -- HR Bhullar
9
Operating activities are primarily the revenue-generating activities of a companyOperating cash flow is conceptually most nearto net profit
Main differences:1. Non-cash expenses and non-cash revenues (f.i.
depreciation expense)2. Non-operating items (f.i. gain on disposal of
tangible fixed assets)3. Timing differences between net profit andunderlying cash flow (f.i. changes in the level ofinventories, receivables, creditors, etc.)
8/11/2019 Cashflow Stmnt - HRB
10/27
Operating cash flows: Examples
Cashflow Statements - IAS 7 -- HR Bhullar
10
Receipts from sale of goods and rendering ofservices (cashing in of receivables included)Receipts from taxes on sales and VATReceipts from royalties, fees, commissions, Payments to suppliers (payment of creditorsincluding services)
Payments to employees (wages & Salaries)Payments of taxes, VAT, fines, Interest
8/11/2019 Cashflow Stmnt - HRB
11/27
Operating cash flows Direct versus indirect method
Cashflow Statements - IAS 7 -- HR Bhullar
11
2 methods for identifying and presenting theoperating cash flow:
Direct method: engenders the presentation ofthe most important categories of grossoperating cash inflows and cash outflowsIndirect method: net operating cash flow is
determined by adjusting the (net) profit figurefor the 3 types of differences
8/11/2019 Cashflow Stmnt - HRB
12/27
Direct method - Example
Cash receipts from customers 30,150
Cash paid to suppliers and employees (27,600)
Cash generated from main operations 2,550
Income taxes paid (1170)
Net cash flow from operating activities 1,380
8/11/2019 Cashflow Stmnt - HRB
13/27
Indirect method - Example
Net profit before tax 3,350
Adjustments for:Depreciation 490
Investment income (100)
3,740
Working capital changes:
Increase in trade and other receivables (500)
Decrease in inventories 1,050
Decrease in trade payables (1,740)
Cash generated from main operations 2,550
Income taxes paidNet cash flow from operating activities
(1170)1,380
8/11/2019 Cashflow Stmnt - HRB
14/27
Cash flows from investing activities
Cashflow Statements - IAS 7 -- HR Bhullar
14
Investing activities relate to the acquisitionand disposal of long-term tangible andintangible assets and other investments
Cash flows from investing activities are anindication of the expansion or downsizing ofoperating capacityExamples:
Payments for newly acquired equipmentReceipts from the disposal of a buildingPayments for new investments
8/11/2019 Cashflow Stmnt - HRB
15/27
8/11/2019 Cashflow Stmnt - HRB
16/27
Constructing a cash flow statement
Cashflow Statements - IAS 7 -- HR Bhullar
16
1. Determine the net change in cashCompare beginning and ending balance
2. Identify all transactions of the period leading to achange in cash
Direct: analyze movements in the accounts of cash (equivalents)transaction by transactionIndirect: explain net change of cash by analyzing all other accounts,knowing that each transaction with an impact on cash also affects anon-cash account
3. Use the information (of step 1 and 2) to construct acash flow statement according to the formal rules
8/11/2019 Cashflow Stmnt - HRB
17/27
Applying step 2
Cashflow Statements - IAS 7 -- HR Bhullar
17
Information for operating cash flow is primarilyderived from balances in the IS, while informationfor the two other principal categories comes from theBalance Sheet (and details in the Notes) Movements in the accounts indicate a change in financial position and further examination isneeded to determine if they had a cash impact
Check if balances have been impacted by accrual - based adjustments or other non -cash activities
8/11/2019 Cashflow Stmnt - HRB
18/27
Classifying balance sheet movements as inflowsor outflows of cash
Cashflow Statements - IAS 7 -- HR Bhullar
18
Assets Equity/liabilities
Increase Outflow Inflow
Decrease Inflow Outflow
8/11/2019 Cashflow Stmnt - HRB
19/27
Disposal of fixed assets - Example
Cashflow Statements - IAS 7 -- HR Bhullar
19
Disposal of equipment: Acquisition cost 275
- Accum. depreciation - 200
Net carrying value = 115 Sale at 135
Result (gain) on disposal = 135 - 115= 20
Incoming cash flow = 135, composed of a decrease in net carrying valueof equipment in the BS (115) and gain on disposal in the IS (20)
8/11/2019 Cashflow Stmnt - HRB
20/27
Presentational choices
Cashflow Statements - IAS 7 -- HR Bhullar
20
Interest paid can be classified under eitheroperating or financing activitiesInterest and dividends received can be included in
either operating or investing cash flowsStarting from net profit or operating profit underthe indirect method (with implications for theadjustments to be made)
8/11/2019 Cashflow Stmnt - HRB
21/27
IAS 7 - Direct Method (Extract)
Cashflow Statements - IAS 7 -- HR Bhullar
21
Source: IAS 7 Cash Flow Statements, Appendices
20X2Cash flows from operating activitiesCash receipts from customers 30,150Cash paid to suppliers and employees (27,600) Cash generated from operations 2,550Interest paid (270) Income taxes paid (900)
Net cash from operating activities 1,380
Cash flows from investing activities Acquisition of subsidiary X, net of cash acquired (550) Purchase of property, plant and equipment (350) Proceeds from sale of equipment 20
Interest received 200Dividends received 200
Net cash used in investing activities (480)
Cash flows from financing activitiesProceeds from issue of share capital 250Proceeds from long-term borrowings 250Payment of finance lease liabilities (90)
Dividends paid* (1,200)
Net cash used in financing activities (790)
Net increase in cash and cash equivalents 110Cash and cash equivalents at beginning of period 120Cash and cash equivalents at end of period 230
8/11/2019 Cashflow Stmnt - HRB
22/27
IAS 7 - Direct Method (Extract)
Cashflow Statements - IAS 7 -- HR Bhullar
22
Source: IAS 7 Cash Flow Statements, Appendices
20X2Cash flows from operating activitiesCash receipts from customers 30,150Cash paid to suppliers and employees (27,600) Cash generated from operations 2,550Interest paid (270) Income taxes paid (900)
Net cash from operating activities 1,380
Cash flows from investing activities Acquisition of subsidiary X, net of cash acquired (550) Purchase of property, plant and equipment (350) Proceeds from sale of equipment 20Interest received 200Dividends received 200
Net cash used in investing activities (480)
8/11/2019 Cashflow Stmnt - HRB
23/27
IAS 7 - Direct Method (Extract- cont.)
Cashflow Statements - IAS 7 -- HR Bhullar
23
Source: IAS 7 Cash Flow Statements, Appendices
Cash flows from financing activitiesProceeds from issue of share capital 250Proceeds from long-term borrowings 250Payment of finance lease liabilities (90) Dividends paid* (1,200)
Net cash used in financing activities(790)
Net increase in cash and cash equivalents 110Cash and cash equivalents at beginning of period 120Cash and cash equivalents at end of period 230
* This could also be shown as an operating cash flow.
8/11/2019 Cashflow Stmnt - HRB
24/27
IAS 7 - Indirect Method (Extract)
Cashflow Statements - IAS 7 -- HR Bhullar
2420X2
Cash flows from operating activitiesProfit before taxation 3,350
Adjustments for:Depreciation 450Foreign exchange loss 40
Investment income (500)Interest expense 400
3,740Increase in trade and other receivables (500)Decrease in inventories 1,050Decrease in trade payables (1,740)
Cash generated from operations 2,550Interest paid (270)Income taxes paid (900)
Net cash from operating activities 1,380
Cash flows from investing activities Acquisition of subsidiary X net of cash acquired (550)Purchase of property, plant and equipment (350)Proceeds from sale of equipment 20Interest received 200Dividends received 200
Net cash used in investing activities (480)
Cash flows from financing activitiesProceeds from issue of share capital 250Proceeds from long-term borrowings 250Payment of finance lease liabilities (90)Dividends paid (1,200)
Net cash used in financing activities (790)
Net increase in cash and cash equivalents 110Cash and cash equivalents at beginning of period 120Cash and cash equivalents at end of period 230
Source: IAS 7 Cash Flow Statements, Appendices
8/11/2019 Cashflow Stmnt - HRB
25/27
IAS 7 - Indirect Method (Extract)
Cashflow Statements - IAS 7 -- HR Bhullar
25
20X2
Cash flows from operating activitiesProfit before taxation 3,350 Adjustments for:
Depreciation 450Foreign exchange loss 40Investment income (500)
Interest expense 4003,740Increase in trade and other receivables (500)Decrease in inventories 1,050Decrease in trade payables (1,740)
Cash generated from operations 2,550
Interest paid (270)Income taxes paid (900)
Net cash from operating activities 1,380
Source: IAS 7 Cash Flow Statements, Appendices
8/11/2019 Cashflow Stmnt - HRB
26/27
Non-cash transactions
Cashflow Statements - IAS 7 -- HR Bhullar
26
These should be excluded from the cash flowstatementThese transactions should be disclosed in thefinancial statements.Examples
Acquisition of assets by assuming directly related liabilities Acquisition of an enterprise by means of issue of equity sharesConversion of debt to equity
8/11/2019 Cashflow Stmnt - HRB
27/27
END Notes: Related questions
Cashflow Statements - IAS 7 -- HR Bhullar
27
1. From which sources did the company raise cashlast year? How was this cash used?
2. Were the normal operating activities capable ofsatisfying its need for cash during the year?
3. If not, is the shortage of cash compensated bynew borrowings, issuing new share capital or byselling fixed assets?
4. Is a surplus of cash used for repayment of debt,for investments or for distribution of dividends?
5. Why has the balance of cash availabledecreased, knowing that the companysoperations have been profitable?