Session 11: Cash Flow Statement

Learning Objective

• Guiding participant on how to prepare cash flow statement

Important Terms

• Cash flow statement
• Operating activities
• Investment activities
• Financing activities

Cashflow Statement

Cash flow statement is produced to show how the enterprise generates and uses cash and cash equivalents. A cash flow statement, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities.

Cash flow statement should report cash flows during the period classified by operating, investing and financing activities.

Operating Activities

Cash flow from operating activities relates to cash generated or paid out through the normal cash generating activities of the enterprise. The enterprise need to generate enough cash flow from these activities as they are the main sources of cash for the business. Cash flow from operating activities will be used to repay loans, maintain the operating capabilities of the enterprise and make new investments.

Cash flow from operating activities includes:

a) cash received from sale of goods or provision of services;
b) cash received from royalties, fees, commission and other revenues;
c) cash payments to suppliers;
d) cash payments to or on behalf of employees
e) cash payments or refund of income tax.

These are cash flow on capital expenditure incurred which will generate future operating cash flows. Examples of cash flows arising from investment activities are:

a) Cash payments to acquire property plant and equipment or cash received from disposal of these assets.
b) Cash payment to acquire equity or debt instruments of other enterprises.
c) Cash received from sale of equity or debt instrument of another enterprise.
d) Cash advances and loans made to other parties.
e) Cash received from the repayments of advances and loans made to other parties;

Financing Activities

Cash flow from financing activities relates to cash flow received from or repaid to outside providers of finance. Examples include:

a) Cash proceeds from issuing of shares or other equity instrument;
b) Cash payments to owners to acquire or redeem the enterprise shares.
c) Cash repayment of amounts borrowed.
d) Cash payments in finance lease
e) Dividend paid to ordinary share holders

Cash flow statement can be produced used direct or indirect method. Direct method discloses the major classes of cash receipts and gross payments. While indirect method begins with net profit which is adjusted with non cash transactions, accrued income or expenses and items of income or expenses associated with investing or financing activities.

Outlined below is the framework of how cash flow statement is supposed to be:

1. Direct method

2. Indirect Method