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CASH FLOW STATEMENTS

 

 

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.

 

Balance Sheet

 

 

 

$

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

 


 

Profit & Loss Account

 

 

$

$

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

 

Supplementary Information

 

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.


 

 Cash Flow Statement

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

 

Accounting Equation:

 

            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.

 

Steps in Producing the cash Flow Statement

 

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.

 

Explanation of the Five Steps

 

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.

 

Note

 

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.

 

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