Summary Financial Statements – Statement of Cash Flows | Introduction to Accounting
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Course
Introduction to Accounting
Institution
University Of Exeter (UoEX)
Summary of Introduction to Accounting notes from The University of Exeter. Student gained a first class degree using these notes. Theory, case studies and extra notes included.
24th October
Financial Statements – Statement of Cash Flows
Importance of cash flow information
• Information about cash flows provides users with details of how the entity generates
and utilises cash flows
• SoCF must be used in conjunction with the accrual basis, SoPL and SoFP
• The accruals basis can produce an excellent result from a profit point of view, but
since cash is cash, it does not suffer from any distortion that might arise in the timing
of income and expenditure recognition
• SoPL does not show the financial position of an entity, so a SoCF shows information
not available from SoPL
• It also shows more clearly how profit is turned into cash
• But, SoCF does not show assets or liabilities, thus on its own we could make no
assessment of an entity’s cash-generating potential
• Without a SoPL, the SoCF cannot tell us how profitable an organisation is, and so how
quickly profit cash
• On its own a SoCF can be subject to manipulation. Entity owners could time their cash
inflows and outflows to present the most flattering picture of their organisation
(accruals), thus we need SoPL and SoFP too
STATEMENT STATEMENT OF STATEMENT
Profit ≠ Cash OF PROFIT OR FINANCIAL OF CASH
FLOW
Example: Start-Up is a small bag business LOSS POSITION
Sales for the first three months are Income
Assets Cash
January: £20,000 employe inflows
February: £30,000 d
Liabilitie Cash
March: £40,000 Expenditu outflows
s to be
Inventory purchased for the first three months are re
paid
January: £15,000 How the financial statements interact
February: £22,500
March: £30,000
All inventory purchased each month is sold so there is no opening or closing inventory
Operating expenses of £2,000 are paid in cash each month
January February March Total
Sales 20,000 30,000 40,000 90,000
Cost of sales (15,000) (22,500) (30,000) 67,500
Opening 0 0 0 0
inventory
Purchases 15,000 22,500 30,000 67,500
Closing 0 0 0 0
inventory
Gross profit 5,000 7,500 10,000 22.500
Operating (2,000) (2,000) (2,000) (6,000)
expenses
Profit 3,000 5,500 8,000 16,500
Statement of Profit or Loss
Statement of Cash Flow 1
Start-Up is unable to obtain credit from its suppliers and pays for goods in month of
purchase
To encourage business, Start-Up allows customers to pay two months after sales are
made
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