Lecture 3 Week 3 PPT 3
Lecture 3 Week 3 PPT 3
Lecture 3 Week 3 PPT 3
Week 3
Cash Flow Statements
All businesses prepare an Income Statement and a Balance Sheet to help the owners make decisions.
Another useful report that can be prepared is the Cash Flow Statement
This Statement shows where the businesss cash came from and how it was spent. It is a summary of all cash receipts and all cash payments generated by the business. It is useful for a business owner to know where the cash is used. A profitable business may have cash flow problems. This report can help to explain why.
The Income Statement and the Balance Sheet are prepared using the principles of accrual accounting. That is, transactions are recorded at the time they occur. The Cash Flow Statement is prepared using the principles of Cash Accounting. Transactions are only recorded when a movement of cash occurs. This means that there will be different amounts shown in the Cash Flow Statement compared with the Income Statement.
These are transactions that do not involve a cash movement. They often occur from general journal entries prepared by the business. Common examples are depreciation expense, doubtful debts expense and profit or loss on the sale of an asset.
1. 2. 3.
The Cash Flow Statement must be presented in accordance with the Accounting Standards. We have prepared a pro forma for your use. The statement is broken into four main areas. The first three categories explain the movement of cash, broken up into the areas of Operating, Investing and Financing.
The final area of the cash flow statement shows the total change in cash, the opening cash balance and then the closing cash balance.
The opening and closing cash balances agree to the amounts in the opening and closing Balance Sheets.
This area of the cash flow shows cash movements from the businesss operations. It mainly consists of items that are recorded in the Income Statement. Remember however that the amounts in the Income Statement may be different to those in the cash flow statement due to the different basis of accounting (cash versus accrual).
Brief Details
Cash
purchases of stock incl GST Payments to creditors Payments for other expenses/GST
Interest paid on loans Interest on overdraft GST paid/received The actual amount paid for GST or received as a refund from the tax office GST paid on Investing GST paid on the purchase of Activities fixed assets
price of fixed assets sold excluding GST Note: This is not the profit or loss on the sale but the actual selling price net of GST Payment for land/buildings Payment for equipment Payment for motor vehicles Payment for plant Payment for furniture All exclusive of GST
Selling
Payment
Additional cash contributions of capital by owner sole trader or partners Amounts paid to the business owner sole trader or partners
Borrowings from loans, mortgages etc Repayment of loans, mortgages etc
Net increase/decrease in cash Cash at beginning reporting period Cash at end of reporting period
The sum of the three cash flow sections Operating, Investing & Financing Cash Balance as per Balance Sheet at start of year
Cash at end of reporting Cash Balance as per Balance period sheet at end of year
Example 11.1
The following is the Bank account taken from the ledger of Contessotto Clothing Company for the year ended 30th June 2006.
Example 11.1
Bank Debit Opening Balance Debtors Interest revenue Commission inc/GST Capital $ 100 000 1 100 000 3 000 5 500 50 000 Credit Rent/GST Wages Creditors Electricity/GST Furniture/GST Drawings Loan GST Payable Advertising/GST Stationery/GST Closing Balance $ 13 200 300 000 440 000 5 500 16 500 5 000 20 000 52 300 22 000 33 000 351 000 1 258 500
1 258 500
Example 8.1
Calculation of GST Payment Collected from sales 100 000 Commission 500 LESS Paid on rent 1 200 Paid on purchases 40 000 Paid on electricity 500 Paid in furniture 1 500 Paid on advertising 2 000 Paid on stationery 3 000 GST Paid to ATO
100 500
48 200 52 300
Example 11.1
In the Cash Flow Statement the payment for furniture will be shown in the Cash Flows from Investing Activities but it must be shown excluding GST The GST payment for the furniture is shown in the Cash Flows from Operating Activities as GST paid on Investing Activities. All other payments and receipts in the Operating Activities section will include GST where applicable.
Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006
Cash Flow from Operating Activities Receipts from Customers Interest received Other Income Received Payments to Suppliers & Employees 1 100 000
Interest Paid GST paid/received GST paid on Investing Activities GST collected on Investing Activities Net Cash from Operating Activities
13 200 300 000 440 000 5 500 22 000 33 000 813 700
Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006
Cash Flow from Operating Activities Receipts from Customers Interest received Other Income Received Payments to Suppliers & Employees 1 100 000
Interest Paid GST paid/received GST paid on Investing Activities GST collected on Investing Activities Net Cash from Operating Activities
Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006
Cash Flow from Investing Activities Proceeds from Sale of Fixed Assets Payment for Fixed Assets Proceeds from sale of investments Payments for investments Net Cash used in Investing Activities
(15 000)
(15 000)
Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006
Cash Flow from Financing Activities Capital Contributed 50 000 Receipts from borrowings (20 000) Repayment of Borrowings
Drawings (5 000) Net Cash used in Financing Activities 25 000
Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006
Net Cash Inflow/(Outflow)
$ 241 000 (15 000) 25 000 251 000 100 000 351 000
In practice there are too many transactions to enable the cash flow statement to be prepared from the Bank ledger account. The cash movements have to be calculated from a review of many ledger accounts, and from an analysis of the Income Statement and Balance Sheet.
By reconstructing ledger accounts we can determine the cash movement. We must also look at changes in the Balance Sheet
Example 11.2
Debtors
Date Details $ Date Details (receipts from Debtors)
370 000 37 000 463 000 463 000 Closing Balance
391 000
30/6/08 Credit
Sales
72 000
GST Payable
Example 11.2
The bank amount would be recorded in the Cash Flow Statement as follows:
Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006 Cash Flow from Operating Activities Receipts from Customers
391 000
Example 11.3
Credit purchases of inventory were $560 000 Creditors balance 1.7.05 $102 000 Creditors balance 30.6.06 $ 98 000
Creditors
Date Details $ Date Details $
30/6/08 Bank
620 000
98 000
102 000
560 000
Closing Balance
718 000
Example 11.3
The bank amount would be recorded in the Cash Flow Statement as follows:
Contessotto Clothing Company Cash Flow Statement for the year ended 30 June 2006
Cash Flow from Operating Activities Receipts from Customers 391 000 Interest Received Payments to Suppliers & (620 000) Employees
The expense amounts that are recorded in the Cash Flow Statement will only be the same amount as in the Income Statement if there are no accruals or prepayments at the end or the beginning of the year. If an expense account includes an accrued or prepaid amount the expense account must be reconstructed to determine the actual cash movement.
End of Week 11