Study Notes on Statement of Cash Flows for ACCA Students Students taking part in
ACCA courses or
ACCA CBE in Ireland will find the following information useful. Reg Callanan is a prizewinning accountancy lecturer for Griffith College ACCA. Statement of cash flow notes are useful for
ACCA Ireland students. When users of financial statements (e.g. shareholders, lenders, potential investors) seek to analyse the current position of a company, there are two important financial features that they will investigate: profitability and liquidity.
For the company to survive and prosper into the future, it must be both liquid and profitable. It is important for ACCA students to understand that just because a company is profitable, it does not necessarily follow that it has the financial ability to meet its short term debts/commitments.
Thus, a company's liquidity situation is crucial to its short-term survival and the statement of cash flows allows the users to examine the current cash position of the company. It will also assist the user in making decisions about the future cash generating ability of the company.
The purpose behind the preparation of a statement of cash flows is pretty straightforward, therefore. It simply seeks to show whether the cash position of the organisation has improved or deteriorated during the period. All cash inflows and outflows (i.e. cash receipts and payments) are reflected in the statement, and each cash flow is placed under its appropriate heading.
Essentially, the statement is equivalent to the company's bank account, in that all cash inflows and outflows of the company are included to arrive at the net cash position of the company at the period end. Though the physical structure of the statement of cash flows is different to the bank account, it uses the same basic principle, i.e. Opening balance at the start of the period
plus Cash received during the period
less Cash paid out during the period
equals Closing balance at the end of the period
Under IAS 7, the statement of cash flows organises the cash inflows and outflows under three headings. These are:
*Cash flows from operating activities
*Cash flows from investing activities
*Cash flows from financing activities
Standardising the layout of the statement in this way allows the comparison of the cash flow performance between different businesses. In addition, the layout highlights the significant elements of cash flow, which will assist users in determining the overall liquidity and viability of the company, as well as helping them to assess its financial adaptability.
Operating Activities:
The cash flows from operating activities are those cash flows that arise from the normal trading of the company. There are two ways of calculating these cash flows (though the same total will be arrived at regardless of the method chosen). The methods are the indirect method and the direct method. In the example Rye Ltd below, we will be using the indirect method.
The profit before tax is determined in the income statement and then adjusted to get from this profit before tax to the actual cash flow. For example, non-cash items included in the calculation of profit are removed (e.g. depreciation).
Investing Activities:
These cash flows include things like:
*Purchase and sale of property, plant and equipment
*Purchase of investments
*Loans to other organisations
*Dividends received
*Royalties received
Financing Activities:
These cash flows principally arise from the long term finance a company receives of repays. They include:
*Receipts from the issue of shares
*Receipts from the issue of debentures/loan stock
*Repayment of debentures/loan stock
The combination of all of these cash flows reflects the total movement in cash and cash equivalents during the period. However, before we look at an example of a statement of cash flows, it is important to understand the definition of cash and cash equivalents in the context of cash flow statements:
Cash: cash on hand;
plus Cash at bank ( i.e. on-demand deposits);
less Bank overdraft
Cash Equivalents: short-term, highly liquid investments that are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value. Thus, these investments can be converted into cash almost instantaneously and given the low risk involved are simply the near equivalents of cash
Students studying ACCA in Ireland should note in order for a company to be in compliance with International Financial Reporting Standards (IFRS), it must produce a complete set of financial statements, which comprise:
1.A Statement of Financial Position
2.A Statement of Comprehensive Income or an Income Statement showing Other Comprehensive Income (OCI)
3.A Statement of Changes in Equity
4.A Statement of Cash Flows
5.Accounting Policies and Explanatory Notes
For company examples and full article please visit www.gcd.ie
