In order to construct a cash flow statement, the following financial statements and information are required:
· Balance Sheets at the beginning & end of the accounting period.
· Profit & Loss Account for the accounting period.
· Supplementary information – not normally found from the accounts, such as the gain or loss on individual assets sold.
EXAMPLE
OF PRODUCTION OF A CASH FLOW STATEMENT
The simplified balance sheets and profit & loss account for Firth of Tay Ltd. are provided.
|
|
$ |
1991 $ |
$ |
1992 $ |
|
Fixed assets (cost less
depreciation) |
100,000 |
|
120,000 |
|
|
Investment |
40,000 |
|
30,000 |
|
|
Inventories |
60,000 |
|
80,000 |
|
|
Debtors |
20,000 |
|
18,000 |
|
|
Cash |
10,000 |
|
22,000 |
|
|
Total Assets of the
company |
|
230,000 |
|
270,000 |
|
Represented by: |
|
|
|
|
|
Owners’ Equity: |
|
|
|
|
|
Share capital |
120,000 |
|
145,000 |
|
|
General reserve |
20,000 |
|
30,000 |
|
|
Profit & Loss account |
15,000 |
|
20,000 |
|
|
|
|
155,000 |
|
195,000 |
|
Liabilities: |
|
|
|
|
|
5% debentures |
40,000 |
|
30,000 |
|
|
Creditors (Current Liability) |
35,000 |
|
45,000 |
|
|
|
|
75,000 |
|
75,000 |
|
|
|
230,000 |
|
270,000 |
|
|
$ |
$ |
|
Gross Profit |
|
36,500 |
|
Less: Depreciation |
(6,000) |
|
|
Loss on sale of
investments |
(1,000) |
|
|
Premium on redemption of debentures |
(1,500) |
|
|
|
|
(8,500) |
|
Operating
Profit |
|
28,000 |
|
Profit on sale
of fixed assets |
|
2,000 |
|
Net profit |
|
30,000 |
|
Retained
earnings (profit brought forward from last year) |
|
15,000 |
|
|
|
45,000 |
|
Proposed
dividends |
(15,000) |
|
|
Transfer to
general reserve |
(10,000) |
(25,000) |
|
Retained
earnings (profit to be taken forward to next year) |
|
20,000 |
1. The company issued 25,000 $1 shares at par during the year.
2. $10,000 debentures were redeemed and a premium of $1,500 was paid.
3. Movement of fixed assets included the purchase of motor vehicles at $31,000 and the sale of plant, which had a book value of $5,000.
4. The investments sold realized $9,000.
Firth of Tay Ltd.
Cash Flow Statement
For the year ending 1992
|
|
|
$ |
$ |
$ |
|
Inflows of Cash |
|
|
|
|
|
Operations
(as adjusted) |
(Note 1) |
36,500 |
|
|
|
Add: Reduction in Debtors |
(Note 2) |
2,000 |
|
|
|
|
|
|
38,500 |
|
|
Less: Increase in Inventories |
(Note 3) |
(20,000) |
|
|
|
Reduction in Creditors |
(Note 4) |
(5,000) |
|
|
|
|
|
|
(25,000) |
|
|
Net Cash
from Operations |
|
|
|
13,500 |
|
Cash from
sale of fixed assets |
(Note 5 & 10) |
|
|
7,000 |
|
Cash from
Sale of Investments |
(note 6) |
|
|
9,000 |
|
Cash from
issue of additional shares |
(Note 7) |
|
|
25,000 |
|
Net Inflow
of Cash |
|
|
|
54,500 |
|
|
|
|
|
|
|
Outflows of Cash |
|
|
|
|
|
Purchase of
Fixed Assets |
(Note 8 & 10) |
|
(31,000) |
|
|
Redemption
of Debentures |
(Note 9) |
|
(11,500) |
|
|
Net Outflow
of Cash |
|
|
|
(42,500) |
|
Increase in
Cash |
(Note 11) |
|
|
12,000 |
Notes
1. Operations
Profit 28,000 (1992)
Add: Depreciation 6,000 (1992)
Loss on sale of investments 1,000 (1992)
Premium on redemption of debentures 1,500 (1992)
Operations (as adjusted) 36,500
2. Debtors
Closing Balance 18,000 (1992)
Closing Balance 20,000 (1991)
Reduction in Debtors (2,000)
3. Inventories
Closing Balance 80,000 (1992)
Closing Balance 60,000 (1991)
Increase in Inventories 20,000
4. Creditors
Closing balance 45,000 (1992)
Closing Balance 35,000 (1991)
Increase in Creditors 10,000
Less: Proposed dividends (not paid) (15,000) (1992)
Reduction in Creditors (5,00)
5. Sale of Fixed Assets (See Note 10)
Sale of Plant at Book Value 5,000 (1992)
Profit from sale of fixed assets 2,000 (1992)
Cash from Sale of Fixed Assets 7,000
6. Investments
Closing Balance 30,000 (1992)
Closing Balance 40,000 (1991)
(10,000)
Add: Loss from sale of investments 1,000 (1992)
Cash from sale of Investments (9,000)
7. Share Capital (at $1 par value)
Closing Balance 145,000 (1992)
Closing Balance 120,000 (1991)
Cash from issue of shares 25,000
8. Purchase of Fixed Assets (See Note 10)
Closing Balance 100,000 (1991)
Closing Balance 100,000 (1991)
20,000
Add: Sale of Plant at Book Value 5,000 (1992)
Depreciation 6,000 (1992)
Purchase of Fixed Assets 31,000
9. 5% Debentures
Closing Balance 30,000 (1992)
Closing Balance 40,00 (1991)
(10,000)
Less: 5% of $30,000 premium (1,500) (1992)
Redemption of Debentures (11,500)
10. Fixed Assets Account
Closing Balance 100,000 (1991)
Add: Purchase of motor vehicles 31,000 (1992)
131,000
Less: Depreciation (6,000) (1992)
Sale of Plant at Book Value (5,000) (1992)
Closing Balance 120,000 (1992)
11. Cash
Closing Balance 22,00 (1992)
Closing Balance 10,00 (1991)
Increase in Cash Balance 11,000 (1992)
TIPS FOR PRODUCING CASH FLOW STATEMENTS
ASSETS = LIABILITIES + OWNER’S EQUITY
(A = L + OE)
The equation can be expanded thus:
|
FIXED ASSETS + CURRENT ASSETS = |
LONG-TERM LIAIBITLITIES + CURRENT LIABILITIES + OWNERS EQUITY |
(FA + CA = LTL + CL + OE)
Current Assets comprise cash, inventories & debtors. Thus the equation, can be further expanded, thus:
Cash + INV + DR + FA = LTL + CL + OE => Cash = (LTL + CL + OE) – (INV + DR + FA)
Accordingly any increase in Long-term Liabilities, Current Liabilities (including Creditors) and/or Owner’s Equity will generate cash and increase a company’s cash position. Any decrease in those areas will reduce the cash position.
Correspondingly, any increase in Inventories, Debtors and/or Fixed Assets will consume cash and therefore reduce a company’s cash position. Any decrease in those areas will produce cash and increase the cash position.
There are three types of business activities reflected in the cash flow statement:
1. Operating activities.
2. Investing activities.
3. Financial activities.
Most companies use accrual-based accounting. The cash flow statement converts that accrual basis net income into a cash basis.
There are five steps in producing the cash flow statement:
1. Adjust net profit for Non-cash expenses.
2. Adjust Net-income or operations (as adjusted) for changes in Working capital.
3. Determine cash used in Investing Activities.
4. Determine cash used in Financing Activities.
5. Total Inflows & Outflows of cash to determine cash position.
|
Step |
Action |
Explanation |
|
1.
|
Adjust net profit for Non-cash expenses. |
· Operating items, which did not use cash but were produced in the P&L account must be added back. · E.g. depreciation is not a use of cash. · This produces the Operations (as adjusted) line. |
|
2.
|
Adjust Net-income or operations (as adjusted) for changes in Working capital. |
· Working Capital is Current Assets – Current Liabilities. · Increases in current assets use cash. Decrease in current assets produces cash. · Increase in current liabilities produces cash. A decrease in current liabilities uses cash. · This will then produce the Net cash from Operations line. |
|
3.
|
Determine cash used in Investing Activities. |
· This concerns the effects on cash in fixed assets on the Balance Sheet. · E.g. buying or selling of plant equipment. · Selling produces cash (Inflow). · Buying uses cash (Outflow). |
|
4.
|
Determine cash used in Financing Activities. |
· There are two ways to finance a company (i) – by long term borrowings; or (ii) – raising money from investors (sale of shares) an increase to OE. · Thus increase in bank loans is a source of cash (Inflow). · Decrease in Bank Loans is a use of cash (Outflow). · Sale/issue of shares is a source of cash (Inflow). · Redemption of debentures is a use of cash (Outflow). |
|
5.
|
Total Inflows & Outflows of cash to determine cash position. |
· Determine whether an increase or decrease in cash for the financial period. · Check against closing cash and bank overdraft balances. |
6. When a company is healthy, operating activities will generate cash. Look at Net Cash from Operations line.
7. Dying businesses stay alive by cannibalising their assets to fund their unprofitable operations. Look for sale of fixed assets & question reason for sale.