Covers the various sections relating to Cash Flow Statement, as per the IEB Accounting SAG.
Includes notes from the textbook, as well as additional class, video and research information.
Applicable to all IEB Grade 12s.
Written by a 90% < student.
Cash Flow Statement
In inflationary times, one would expect rising selling prices to generate sufficient cash to
compensate for the rising costs of running a business.
However, this is not always true.
Example: If most of the company’s sales are on credit, this will lead to an increase in debtors.
Cash would not be immediately available to finance the purchase of new stock.
A recession will add to the liquidity, solvency and cash flow problems that a company could
experience.
Example: 2008 worldwide recession
Purpose of a Cash Flow statement:
The objective is to provide users of the financial statements with information of all the financial
resources (Fixed assets, debtors, creditors, interest, sales, shareholders capital etc.)during the
accounting period.
In particular, details of any cash generated or used during operations, investing and financing
activities.
The cash flow statement will:
- Reflect a summary of all cash received and paid during a financial period
- Provide quality information to the users of company financial statements
- Assist in identifying the degree of risk
- Assist in identifying the ability of the company to generate profits and favourable cash flow in
- the future
The cash flow statement is intended to explain the way in which the cash resources of a
company have changed.
, Components of a Cash Flow Statement
3 categories of activity: operating, financing and investing
No brackets - in flow of cash
Brackets - out flow of cash
Information about the three activities can be found in the company’s Income Statement and
Balance Sheet.
Operating
= the main income-earning activities of the company
They are directly related to the main objective of a company.
Examples - buying and selling stock, paying creditors, receiving payments from debtors, paying
Examples - all the expenses, paying tax, paying dividends
Calculation
1. Depreciation and interest on loans need to be removed from the calculation as they are non
1. cash items.
2. Working capital
Compare two consecutive years.
Larger value minus the smaller one.
Last year > This year = decrease
Last year < This year = increase
Inventories:
Increase = ( x )
Decrease = x
Debtors:
Increase = ( x )
Decrease = x
Creditors:
Increase = x
Decrease = ( x )
1 and 2 = Note 1: Reconciliation of cash generated from operating activities
Net profit before tax
Adjustments in regard to:
Depreciation +
Interest income - comes from income statement ( )
Interest expense - comes from income statement +
Operating profit before changes in working capital A
Cash effects of changes in working capital: B
…… in Inventory - comes from balance sheet
…… in Debtors - comes from balance sheet
…… in Creditors - comes from balance sheet
Cash generated from operations A+B
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller KirstenBarbour. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R80,00. You're not tied to anything after your purchase.
