topic 26 statements of cash flow

• Receipts and payments are different to income and expenditure. No company can operate without cash, however the IS and SOFP do not tell users of accounts how well a company is managing its cash flow
• Cash - notes and coins and current account balances
• Cash equivalents - other short term deposits
• Cash inflows (sources):

  • profits
  • interest received
  • dividends received
  • tax refund
  • sale of ncas
  • decrease in inv
  • decrease in receivables
  • increase in payables
  • increase in share capital
  • increase in loans
  • issue of debentures
• Cash outflows (uses):

  • losses
  • interest paid
  • dividends paid
  • tax paid
  • purchase of ncas
  • increase in inv
  • increase in receivables
  • decrease in payables
  • redemption of share capital
  • repayment of loans
  • redemption of debentures
• A company can make a profit but still have a bank overdraft:

  • timing differences - sales on credit are recorded when the transaction takes place but receivables pay cash later
  • capital expenditure - does not affect profit but may result in significant cash outflows
  • repayment of loans - no effect on profit but a cash outflow
  • drawings/dividends - no effect on profit but do reduce cash
  • accruals - accrued income is added to calculate profit even though the income has not yet been paid into the bank, prepaid expenses are deducted from expenses but have been paid
  • non-cash items
• A company can make a loss but increase its cash balance:

  • purchases on credit are recorded when they take place and reduce profit but will not reduce cash until they are paid for
  • capital receipts - the disposal proceeds are a cash inflow but only the profit(loss) on sale goes in the IS
  • finance raised - share issues or loans received will increase cash but have no effect on profit, only interest on loans go in the IS
  • accruals - accrued expenses are added when calculating profit and prepaid income is deducted this reduces profit even thought there is no movement of cash
  • non-cash items
• Adjustments for non-cash items:

  • depreciation -> add back depn charge for the year
  • amortisation -> add back amortisation charge for the year
  • provision for doubtful debts -> add back increase in provision -> deduct decrease in provision
  • sale of assets -> add back loss on sale -> deduct profit on sale
• Reconciliation of profit/loss on operations to net cash from operating activities:

  Profit from operations

  Depn

  Amortisation of intangible assets

  Loss on sale of equipment

  Profit on sale of vehicle ()

  Increase in inv ()

  Decrease in receivables

  Increase in payables

  Cash from operations

  Interest paid ()

  Taxes paid ()

  Net cash from operating activities
• OIF:

  • operating - net cash from (used in) operating activities
  • investing - purchase and proceeds of ncas, investment revenues = net cash from investing activities
  • financing - proceeds of issue of OSC, repayment of share capital, proceeds from long term borrowings, repayment of long term borrowings, dividends paid = net cash from financing activities
  • O+I+F = net increase (decrease) in cash and cash equivalents
  • net increase (decrease) in cash and cash equivalents + cash and cash eq at the beginning of the year = cash and cash eq at the end of the year
• Retained earnings (new)

  Minus Retained earnings (old)

  = Retained earnings

  Minus dividends paid

  Minus tax

  Minus interest

  = Profit from operations
• When there are no disposals of ncas the calculation of depn is the difference in the depn charge between the two years. When there are no disposals the change in ncas from one year to the next is also simple - calculated by comparing the change in cost (nbv) from one year to the next
• Calculation of cash flows on disposal of ncas:

  • the disposal proceeds are an inflow in the investing section
  • the profit (loss) on disposal is an adjustment in the reconciliation of profit (loss) to net cash from operating activities
• Example - During the year ended 30th April 2022 non-current assets which had cost £720000 and depreciated by £433000 were sold for £274000. Cash inflow on disposal = £274000. Loss on disposal 720000 (cost) - 433000 (depn) = 287000 nbv - 274000 (proceeds) = 13000 (loss on disposal)
• Bonus issues:

  • the issue of more shares should be included as an inflow in the financing section , provided the shares have been issued to raise finance
  • a bonus issue involves no movement of cash and should not be included in the statement of cash flows