Lecture 6 - Statement of Cashflows

• The Statement of Cash Flows

  Enables users to assess the ability of the entity to generate cash and cash equivalents, including access to external finance, and the needs of the entity to utilise those cash flows to meet financial commitments (principal, interest and dividends) and fund changes in scope and / or nature of its activities
• Cash flow activities


  • Operating
  • Investing
  • Financing
• Operating Activities


  Cash flows primarily derived from principal revenue-producing activities of the entity and other activities that are not investing or financing activities. A key indicator of the extent to which the operations of the entity have generated sufficient cash flows to repay loans, maintain operating capability, pay dividends, and make new investments.
• Cash inflows from operating activities


  • Receipts from the sale of goods or rendering of services, including non-core sources, regardless of the period the revenue is earned
• Cash outflows from operating activities

  • Payments to suppliers of all goods and services, regardless of the period the G&S are received or consumed
• Operating cash flows generally result from transactions and other events that involve the determination of profit or loss
• Investing Activities


  Cash flows related to the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Useful in analysing the extent to which expenditures have been made for resources intended to generate future income and cash flows.
• Cash flows from investing activities

  • Payments to acquire or invest in, and Proceeds from disposals or maturity of PPE, intangibles or other long-term assets, Businesses and shares in other companies, Long-term interest-bearing deposits, Principal relating to loans to employees and other entities
• Investing cash flows generally result from transactions events involving non-current assets
• Free Cash Flow


  Calculated by NCF from operating activities less Capital expenditure. Reflects the entity's free cash available to repay debt, pay dividends and expand the business operating capacity.
• Financing Activities


  Cash flows that result in changes in the size and composition of the contributed equity and interest-bearing liabilities of the entity. Useful in predicting claims on future cash flows by providers of capital (i.e. debt and equity) to the entity.
• Cash flows from financing activities

  • Proceeds from issuing shares, Payments to acquire shares from owners (i.e. buy-backs), Proceeds from borrowings or issuing debt, Repayments of principal related to borrowings or lease liabilities
• Interest and dividends received and paid shall be disclosed separately and classified in a consistent manner from period to period as either operating, investing or financing activities
• Cash flows arising from taxes on income shall be separately disclosed and shall be classified as operating activities
• EQUITY


  LIABILITIES
• Retained profits


  Reserves
• Non-current liabilities


  Current liabilities
• Non-current assets


  Current assets
• Dividends


  Expenses
• OPERATING


  INVESTING
• The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities
• The statement of cash flows must report or disclose the amount of cash flows arising from each activity, all major classes of cash receipts and cash payments, interest and dividends received and paid, income tax paid, cash and cash equivalents at beginning and end, components of cash and cash equivalents, and a reconciliation with the SoFPos
• Cash Generated from Operations

  • Myer Annual Report 2023 p.60
  • Virgin Australia Holdings Annual Report 2019 p.49
• An entity shall disclose the components of cash and cash equivalents and shall present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position
• Reconciling Cash and Cash Equivalents

  • Harvey Norman Appendix 4E Year End Report 2023 p.58
• Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows but shall be disclosed in the Notes in a way that provides all the relevant information about these (non-cash) investing and financing activities
• Some Revenue = Cash receipts


  Some Revenue ≠ Receipts
• Some expenses = cash payments


  Some Expenses ≠ Payments
• Depreciation, amortisation and impairment are not cash flows
• An Australian-specific disclosure: Profit must be reconciled to net cash provided/used by operations
• The Usefulness of a Statement of Cash Flows

  For Investors: Increased reliance on operating cash flows as being a more reliable indicator of earnings quality since the prevalence of earnings management techniques used to manipulate information in the income statement. For Lenders: Statement of cash flows can be used to assess organisation's management of cash and whether it has or can generate sufficient cash to service principal repayments and interest.
• Positive indicators from a Statement of Cash Flows

  • Adequate levels of cash and cash equivalents
  • +ve Operating CF
  • Receipts from customers > Payments to suppliers (CGO)
  • NOCF / CGO ≈ EBITDA (indication of earnings quality)
  • -ve Investing CF (indication of growth)
  • -ve Financing CF or +ve Financing CF ≈ -ve Investing CF
• A Cash Flow Case Study

  • Company A
  • Company B
• A Statement of Cash Flows enables users to evaluate the entity's ability to generate cash flows in the future, to pay dividends and finance growth
• Agency issues are minimal
• A Statement of Cash Flows can provide early warning indicators of financial stress
• Statement of Financial Position


  Statement of Comprehensive Income
• St of Changes in Equity

  Profit or loss
• Cash & Cash Eq


  Stocks at start
• What we have covered to this point: The role of accounting in providing information for decision making, A Conceptual Framework for recognising and measuring economic events, Considered the nature and content of information disclosed in financial statements, Potential agency issues arising from estimations, choices and judgments during the preparation of financial statements