Cash Flow Statement Lecture Slides PDF

CASH FLOW STATEMENT (Direct method) 2020 – Prinesh Bikhani 4 Cash Flow Statements 4 3 MAIN SECTIONS of CFS Operating Activities Investing...

CASH FLOW STATEMENT (Direct method) 2020 – Prinesh Bikhani 4 Cash Flow Statements 4 3 MAIN SECTIONS of CFS Operating Activities Investing Activities Financing Activities 2020 – Prinesh Bikhani 5 Cash Flow Statements 5 3  EXPLANATION OF MAIN SECTIONS Cash flows from OPERATING ACTIVITIES – The principal REVENUE-PRODUCING activities Cash flows from INVESTING ACTIVITIES – TheDISPOSAL AND ACQUISITION OF ASSETS and other investments Cash flows from FINANCING ACTIVITIES – The activities that result in changes of the EQUITY and BORROWINGS of the entity. 2020 – Prinesh Bikhani 6 Cash Flow Statements 6 MAIN THING TO REMEMBER For all accounts, we care about CASH MOVEMENTS Bank + other relevant accounts = CASH AND CASH EQUIVALENTS (e.g. 3 month fixed deposit) Cash flow statement = CASH MOVEMENTS 2020 – Prinesh Bikhani 7 Cash Flow Statements 7 4  INFLOWS AND OUTFLOWS OUTFLOWS OF CASH ARE SHOWN IN (BRACKETS) INFLOWS ARE NOT IN BRACKETS 2020 – Prinesh Bikhani 8 Cash Flow Statements 8 FORMAT of CASH FLOW STATEMENT 2020 – Prinesh Bikhani 9 Cash Flow Statements 9 5  2020 – Prinesh Bikhani 10 Cash Flow Statements 10 Operating Activities Note the different types of INFLOWS and (OUTFLOWS) 2020 – Prinesh Bikhani 11 Cash Flow Statements 11 6  Investing Activities 2020 – Prinesh Bikhani 12 Cash Flow Statements 12 Financing Activities 2020 – Prinesh Bikhani 13 Cash Flow Statements 13 7  Last Section 2020 – Prinesh Bikhani 14 Cash Flow Statements 14 EXAMPLE 1 Cash Inflow from Operating Activities 48 000 Cash Outflow from Investing Activities 14 000 Cash Outflow from Financing Activities 10 000 Bank Overdraft at beginning of year 20 000 Draw up a Draft Cash Flow Statement 2020 – Prinesh Bikhani 15 Cash Flow Statements 15 8  SOLUTION 1 Cash Inflow from Operating Activities 48 000 Cash Outflow from Investing Activities (14 000) Cash Outflow from Financing Activities (10 000) Cash and Cash Equivalents for the year 24 000 Cash and Cash Equivalents at beg. of year (20 000) Cash and Cash Equivalents at the end of year 4 000 2020 – Prinesh Bikhani 16 Cash Flow Statements 16 CASH GENERATED FROM OPERATIONS 17 Cash Flow Statements 2020 – Prinesh Bikhani 17 9  CASH GENERATED FROM OPERATIONS 1 000 (230) 770 In a test/ exam you You need to know the will be asked to relationship between calculate any of these them amounts 2020 – Prinesh Bikhani 18 Cash Flow Statements 18 CASH RECEIPTS FROM CUSTOMERS Example http://www.accountingformanagement.org/exercise-7-socf/ 2020 – Prinesh Bikhani 19 Cash Flow Statements 19 10  1 000 (230) 770 2020 – Prinesh Bikhani 20 Cash Flow Statements 20 EXAMPLE 2 R ‘ 000 Accounts Receivable: Beginning of year 500 Accounts Receivable: End of year 600 Total Sales 1 200 Cash Sales 800 Credit Sales 400 Bad Debts written off 75 Calculate Cash Received from Customers Hint: Use journal entries for Debtors 2020 – Prinesh Bikhani 21 Cash Flow Statements 21 11  SOLUTION 2 R ‘ 000 Accounts Receivable: Beginning of year 500 Total Sales 1 200 Accounts Receivable: End of year (600) Bad Debts written off (75) Cash Received from Customers 1 025 Cash Received from Customers relates to Cash sales AND when customers paid you for credit sales 2020 – Prinesh Bikhani 22 Cash Flow Statements 22 SOLUTION 2 Dr CASH RECEIVED FROM CUSTOMERS Cr Opening Bal 500 Bank 1 025 Sales 1 200 Bad Debts 75 Closing Bal 600 1 700 1 700 Opening Bal 600 “Bank” is the BALANCING FIGURE 2020 – Prinesh Bikhani 23 Cash Flow Statements 23 12  RECONCILIATION OF PROFIT BEFORE TAX TO CASH GENERATED FROM OPERATIONS 2020 – Prinesh Bikhani 24 Cash Flow Statements 24 1 000 (230) 770 25 Cash Flow Statements 2020 – Prinesh Bikhani 25 13  2020 – Prinesh Bikhani 26 Cash Flow Statements 26 27 Cash Flow Statements 2020 – Prinesh Bikhani 27 14  EXAMPLE 3 R ‘ 000 R ‘ 000 2018 2017 Profit before tax 1 500 785 Depreciation 50 60 Profit on sale of PPE 200 - Interest expense 70 96 Bad Debts 40 80 Inventory 400 200 Accounts Payable 180 - Accounts Receivable 220 290 Calculate Reconciliation of Profit before tax to cash generated from operations 2020 – Prinesh Bikhani 28 Cash Flow Statements 28 WORKINGS 3 R ‘ 000 R ‘ 000 2018 2017 DIFF Profit before tax 1 500 785 Start here Depreciation 50 60 Non-cash Profit on sale of PPE 200 - Non-cash Interest expense 70 96 separately disclosable Bad Debts 40 80 Included in Accounts Receivable Inventory 400 200 (200) outflow Accounts Payable 180 - 180 inflow Accounts Receivable 220 290 70 inflow 2020 – Prinesh Bikhani 29 Cash Flow Statements 29 15  WORKINGS 3 Hint: Think of LIQUIDITY Inventory outflow Inventory inflow Accounts Payable inflow Accounts Payable outflow Accounts Receivable outflow Accounts Receivable inflow 2020 – Prinesh Bikhani 30 Cash Flow Statements 30 SOLUTION 3 R ‘ 000 2018 PROFIT BEFORE TAX 1 500 Depreciation 50 Add expense Profit on sale of PPE (200) Subtract profit Interest expense 70 Add expense Inventory (200) outflow Accounts Payable 180 inflow Accounts Receivable 70 inflow CASH GEN from 1 470 OPERATIONS 2020 – Prinesh Bikhani 31 Cash Flow Statements 31 16  Reconciliation (1 of 2) Profit before tax Adjust for Separately disclosable Items ƒ Interest expense ƒ Dividend income ƒ Investment income/ interest received Adjust for non-cash flow items ƒ Depreciation ƒ Profit/ Loss on Sale of Assets ƒ Impairment Don’t include bad debts. Why? Because it’s taken into account in Accounts Receivable Movements 2020 – Prinesh Bikhani 32 Cash Flow Statements 32 Reconciliation (2 of 2) Working Capital Changes ƒ Increase/ Decrease in Inventory ƒ Increase/ Decrease Accounts Receivable ƒ Increase/ Decrease Accounts Payable ƒ Any changes in other accounts like prepaid expenses, accrued expenses etc. Cash generated from Operations 2020 – Prinesh Bikhani 33 Cash Flow Statements 33 17  CASH PAID TO SUPPLIERS AND EMPLOYEES 2020 – Prinesh Bikhani 34 Cash Flow Statements 34 1 000 (230) 770 35 Cash Flow Statements 2020 – Prinesh Bikhani 35 18  2020 – Prinesh Bikhani 36 Cash Flow Statements 36 EXAMPLE 4 R ‘ 000 R ‘ 000 2018 2017 Sales 3 600 1 850 Profit before tax 1 500 785 Depreciation 50 60 Profit on sale of PPE 200 - Interest expense 70 96 Bad Debts 40 80 Inventory 400 200 Accounts Payable 180 - Accounts Receivable 220 290 Calculate Cash Paid to Suppliers and Employees 2020 – Prinesh Bikhani 37 Cash Flow Statements 37 19  WORKINGS 4 R ‘ 000 R ‘ 000 2018 2017 DIFF Sales 3 600 1 850 Start here Profit before tax 1 500 785 Depreciation 50 60 Non-cash Profit on sale of PPE 200 - Non-cash Interest expense 70 96 separately disclosable Bad Debts 40 80 Included as we do not include Acc. Rec. Inventory 400 200 (200) outflow Accounts Payable 180 - 180 inflow Accounts Receivable 220 290 70 n/a – Not related to expenses 2020 – Prinesh Bikhani 38 Cash Flow Statements 38 SOLUTION 4 2018 SALES 3 600 Less PROFIT BEFORE TAX (1 500) NET EXPENSES and COS 2 100 Depreciation (50) Profit on sale of PPE 200 Interest expense (70) Bad Debts (40) Inventory 200 Accounts Payable (180) CASH PAID TO SS and EE 2 160 2020 – Prinesh Bikhani 39 Cash Flow Statements 39 20  Cash paid to suppliers and employees (1 of 2) Sales LESS Profit before tax EQUALS Cost of Sales + Other Expenses Adjust for Separately disclosable Items ƒ Interest expense ƒ Dividend income ƒ Investment income/ Interest received Adjust for non-cash flow items ƒ Depreciation ƒ Profit/ Loss on Sale of Assets ƒ Impairment ƒ Bad Debts (from Income Statement) 2020 – Prinesh Bikhani 40 Cash Flow Statements 40 Cash paid to suppliers and employees (2 of 2) Working Capital Changes ƒ Increase/ Decrease in Inventory ƒ IGNORE ACCOUNTS RECEIVABLE ƒ Increase/ Decrease Accounts Payable ƒ Any changes in other accounts like prepaid expenses, accrued expenses etc. Cash paid to suppliers and employees Ignore Accounts Receivable as this relates to CUSTOMERS therefore irrelevant to this calculation 2020 – Prinesh Bikhani 41 Cash Flow Statements 41 21  COMPARE RECON TO CASH PAID TO SS Cash Paid to Recon SS and EE SALES 3 600 PROFIT BEFORE TAX 1 500 (1 500) NET EXPENSES and COS 2 100 Depreciation 50 (50) Profit on sale of PPE (200) 200 Interest expense 70 (70) Bad Debts (40) Inventory (200) 200 Accounts Payable 180 (180) Accounts Receivable 70 CASG GEN FROM OPERATIONS 1 470 CASH PAID TO SS and EE 2 160 2020 – Prinesh Bikhani 42 Cash Flow Statements 42 OTHER GL ACCOUNTS 2020 – Prinesh Bikhani 43 Cash Flow Statements 43 22  2020 – Prinesh Bikhani 44 Cash Flow Statements 44 2020 – Prinesh Bikhani 45 Cash Flow Statements 45 23  EXAMPLE 5 R ‘ 000 SARS (Current Tax Payable): Beginning of year 700 SARS: End of year 890 Total Tax Expense 1 800 Calculate Taxation Paid 2020 – Prinesh Bikhani 46 Cash Flow Statements 46 SOLUTION 5 R ‘ 000 SARS (Current Tax Payable): Beginning of year 700 SARS: End of year (890) Total Tax Expense 1 800 Taxation Paid 1 610 2020 – Prinesh Bikhani 47 Cash Flow Statements 47 24  SOLUTION 5 Dr SARS Cr Bank 1 610 Opening Bal 700 Closing Bal 890 Tax Expense 1 800 2 500 2 500 Opening Bal 890 “Bank” is the BALANCING FIGURE 2020 – Prinesh Bikhani 48 Cash Flow Statements 48 EXAMPLE 6 R ‘ 000 Shareholders for Dividends: Beginning of year 600 Shareholders for Dividends: End of year 500 Total Dividend Expense 2 650 Calculate Dividends Paid 2020 – Prinesh Bikhani 49 Cash Flow Statements 49 25  SOLUTION 6 R ‘ 000 Shareholders for Dividends: Beginning of year 600 Shareholders for Dividends: End of year (500) Total Dividend Expense 2 650 Dividends Paid 2 750 2020 – Prinesh Bikhani 50 Cash Flow Statements 50 SOLUTION 6 Dr Shareholders for Dividends Cr Bank 2 750 Opening Bal 600 Closing Bal 500 Dividend Exp 2 650 3 250 3 250 Opening Bal 500 “Bank” is the BALANCING FIGURE 2020 – Prinesh Bikhani 51 Cash Flow Statements 51 26  ASSET DISPOSAL 2020 – Prinesh Bikhani 52 Cash Flow Statements 52 STEPS TO DISPOSE OF AN ASSET CURRENT YEAR Dr. Depreciation DEPRECIATION Cr. Accumulated depreciation Dr. Asset Disposal TRANSFER COST Cr. Cost of Asset TRANSFER ACC Dr. Accumulated Depreciation DEP Cr. Asset Disposal RECORD Dr. Bank/ Debtors/ Creditors PROCEEDS Cr. Asset Disposal Dr. Asset Disposal RECORD PROFIT OR LOSS Cr. Profit on Sale of Asset OR Dr. Loss on Sale of Asset Cr. Asset Disposal 2020 – Prinesh Bikhani 53 Cash Flow Statements 53 27  ASSET DISPOSAL GL ACCOUNT In this example, we have a LOSS Asset Disposal Note that we care about the Bank/ Proceeds amount – this goes into the Cash Flow 2020 – Prinesh Bikhani 54 Cash Flow Statements 54 Asset Disposal NOTE ƒ Profit/ Loss on disposal is a non-cash flow item. ƒ Usually any proceeds received on disposal is a cash flow item ƒ You need to RECONSTRUCT you asset accounts and asset disposal accounts to find these amounts. 2020 – Prinesh Bikhani 55 Cash Flow Statements 55 28  EXAMPLE 7 R ‘ 000 Cost of Motor Vehicle 750 Accumulated Depreciation till date of sale 450 Selling Price (cash) 200 Calculate Profit or Loss on Sale 2020 – Prinesh Bikhani 56 Cash Flow Statements 56 SOLUTION 7 R ‘ 000 Cost 750 Less Accumulated Depreciation (450) Book Value 300 Selling Price 200 Less Book Value (300) Loss (100) 2020 – Prinesh Bikhani 57 Cash Flow Statements 57 29  SOLUTION 7 Dr Asset Disposal Cr Cost 750 Accum. Depr 450 Bank 200 Loss 100 750 750 “Loss” is the BALANCING FIGURE 2020 – Prinesh Bikhani 58 Cash Flow Statements 58 EXAMPLE 8 R ‘ 000 Cost of Plant 1 500 Accumulated Depreciation till date of sale 370 Selling Price (cash) ? Profit on Sale 960 Calculate Selling Price (cash received) 2020 – Prinesh Bikhani 59 Cash Flow Statements 59 30  SOLUTION 8 R ‘ 000 Cost 1 500 Less Accumulated Depreciation (370) Book Value 1 130 Add Profit (or Less Loss) 960 SELLING PRICE/ PROCEEDS 2 090 Selling Price will go to INVESTING ACTIVITIES as Proceeds on Disposal 2020 – Prinesh Bikhani 60 Cash Flow Statements 60 SOLUTION 8 Dr Asset Disposal Cr Cost 1 500 Accum. Depr 370 Profit on disp 960 Bank 2 090 2 460 2 460 “Bank” is the BALANCING FIGURE 2020 – Prinesh Bikhani 61 Cash Flow Statements 61 31  EXAMPLE 9 R ‘ 000 R ‘ 000 Plant and Machinery 2018 2017 Cost 2 500 1 200 Accumulated Deprecation 890 670 Depreciation 750 Profit on disposal of machine 100 Cost of machine sold ? Acc Dep of Machine Sold ? Proceeds on machine disposal ? Acquisitions of Plant (cash) 2 300 Show T Accounts and calc missing amts: - PPE - Accumulated Dep. - Asset Disposal 2020 – Prinesh Bikhani 62 Cash Flow Statements 62 SOLUTION 9 Dr PPE Cr Opening Bal 1 200 Asset Disposal 1 000 Acquisitions 2 300 Closing Bal 2 500 3 500 3 500 Opening Bal 2 500 “Asset Disposal” is the BALANCING FIGURE 2020 – Prinesh Bikhani 63 Cash Flow Statements 63 32  SOLUTION 9 Dr Accumulated Depr. Cr Asset Disposal 530 Opening Bal 670 Closing Bal 890 Depreciation 750 1 420 1 420 Opening Bal 890 “Asset Disposal” is the BALANCING FIGURE 2020 – Prinesh Bikhani 64 Cash Flow Statements 64 SOLUTION 9 Dr Asset Disposal Cr Cost 1 000 Accum. Depr 530 Profit on disp 100 Bank (proceeds) 570 1 100 1 100 “Bank” is the BALANCING FIGURE 2020 – Prinesh Bikhani 65 Cash Flow Statements 65 33