For Beginners: What is Statement of Cash Flows?

    

    When I’ve heard from people that “My cash flow is ok and I do not have problem dealing with it.” I will just say to myself; “That person has lots of cash readily available.” In a business’ perspective, it’s not that easy to compute for the cash flow, there are technical terms and items to follow which is presented in the Statement of Cash Flows which is part of the Financial Statements.

    What is the objective of Statement of Cash Flows?

    Per International Accounting Standards (IAS) 7,

    - To enquire that businesses provide information about the historical changes in CASH

-       - To classify cash inflows and outflows during the period between those arising from

    a) OPERATING,

    b) INVESTING, and

    c) FINANCING activities

    There are 2 methods to prepare Statement of Cash Flows;

    a) Direct Method

        b) Indirect Method

    Both are acceptable but for simplicity and less tedious we will be using the Indirect Method

    You should first familiarize with my blog Financial Statements for Beginners http://egaykenriquez.blogspot.co.uk/2013/01/understanding-financial-statements-for.html

since most of the terminologies below were taken from the EDG’s Statements of Financial Position, Comprehensive Income and Changes in Equity presented there.

EDG Statement of Cash Flows for the year ended 31 December 2012

Cash flows from operating activities
Net profit(loss) before tax						$x
Adjustments for:
Interest expense						x
Depreciation						x
Increase / decrease in prepaid insurance						(x)/x
Increase / decrease in other liab/accruals						x/(x)
Operating profit before working capital changes						x
Increase/decrease in inventory						(x)/x
Increase/decrease in receivables						(x)/x
Increase/decrease in payables						x/(x)
Cash generated from operations						x
Interest expense paid						(x)
Net cash from operating activities							x
Cash flows from investing activities
Purchases of property and end equipment						(x)
Proceeds of sale of property and equipment						x
Net cash used in investing activities							(x)
Cash flows from financing activities:
Proceeds from issues of shares						x
Proceeds from long-term loans						x
Dividends paid						(x)
Net cash used in financing activities							(x)
Net increase in cash							x
Cash at beginning of the period							x
Cash at end of the period							$x

    Note: The balance of Cash at the end of the period SHOULD be the same as the Cash balance in the EDG Statement of Financial Position as at 31 December 2012.

    For Operating Activities:

    - There is difference between cash flow and profit. Profit before tax is computed using the accruals concept. Adjustments are required to get from profit before tax back to cash flow

-     Depreciation is not a cash flow. Depreciation has to be added back to reported profit in deriving cash from operating activities

- Increases in receivables AND inventory are deduction from profit in deriving cash from operating activities, decreases are addition to profit

- Increases in payables and accruals are additions to profit in deriving cash from operating activities, decreases are deduction from profit

 

For Investing Activities:

- Cash paid for property and equipment

-    -Cash received for disposal/sale of property and equipment

For Financing Activities:

- Cash receipts from issuing shares and loans

-    - Cash payments for loans and dividends