1. Cash Flow Statements
Cash flow statement may provide considerable information about what is really happening in
a business beyond that contained in either the income statement or the balance sheet.
Analysing this statement should not present an intimidating task; instead it will quickly
become obvious that the benefits of understanding the sources and uses of a company’s cash
far outweigh the costs of undertaking some very straightforward analyses.
Who cares about a Cash Flow Statement?
• Managementmay want to know if the cash generated by the company will be sufficient
to fund their expansion strategy
• Shareholders may want to know if the firm is generating enough cash to pay dividends
•Suppliers want to know if their customers will be able to pay if offered credit
Investors want to evaluate future growth potential
•Employeesare interested in the overall viability of their employer as indicated by its
ability to fund its operations
Reasons why companies prepare a cash flow statements
To show the future cash inflows and outflows
To help predict future cash flows
To assist with financial planning
To assist in assessing the liquidity of the business
To show that profits does not always equal cash
To comply with legal requirements
Aims:
Students will be able to prepare a Cashflow statement
Reconcile operating profit to net cash flow from operating activities
Reconcile movement in cash to movement in net debt
Explain why profit does not always equal cash

2. Rules for reconciling operating profit to net Cashflow from operating
activities
Depreciation –does not affect cash flow always ADD
Increase in Debtors Outflow=SUBTRACT
Decrease in Creditors Outflow=SUBTRACT
Increase in Stocks Outflow=SUBTRACT
Decrease in Debtors Inflows= ADD
Increase in Creditors Inflows=ADD
Decrease in Stocks Inflows= ADD
Cash flow Statement explain the difference between cash balances at the beginning of the
year and cash balances at the end of the year
Financial Reporting Standard 1 outlines how cash flow statements must be presented, and the
layout of the statement and the two reconciliation notes with it must be done in accordance
with the FRS1.
1. Reconciliation of Operating Profit to Net Cash Flow from Operating Activities
Cash flow is derived from the operating activities of the business/firm and Operating profit is
adjusted for changes in; Stock, Debtors, Creditors, Non-Cash Items.
Non-Cash items do not cause on inflow/outflow of cash but do affect net profit.
Examples include depreciation, profit/loss on disposal of assets, changes in provision for bad
debts, writing off of patents.

3. Reconciliation of Operating Profit to Net Cash Flow from Operating Activities
€€
Operating Profit
Add Depreciation
Less Profit on disposal of Fixed Assets(Add loss on disposal)
Add decrease in Stock(Less increase in Stock)
Add decrease in Debtors(Less increase in Debtors)
Less decrease in Creditors(Add increase in Creditors)
Add Increase in Bad Debt Provision(Less decrease in BDP)
Add Patents written off
Net Cash Flow from Operating Activitiesxxxxxx

4. Cash Flow Statement
It is very important that students learn the layout and know the headings and the
inflows/outflows that appear under each heading. In exams marks may be awarded for the
headings only if they are laid out in the prescribed format as below
Cashflow forecast of XYZ Ltd for the y/e 31/12/20XX
€€
Operating Activities
Net Cashflow from operating activities
Return on Investment & Servicing of Finance
Interest Received
Interest paid
Preference dividend paid
Dividends Received
Taxation
Taxation Paid
Capital Expenditure & Financial Investment
Payment to acquire fixed assets
Receipts from sale of fixed assets
Payments to acquire investments
Receipts from sale of investments
Equity dividend paid
Ordinary dividends paid
= Net cash inflow before liquid resources and financing
Management of Liquid Resources
Purchase of Govt securities
Sale of Govt securities
Payment into Current Asset investments/short-term deposits
Withdrawal fromCurrent Asset investments/short-term deposits
Financing
Receipts from the issue of shares
Receipts from share premium
Repayment of Debentures/loans
Receipts from issue of Debentures/loans
= Increase /Decrease in Cash

5. Reconciliation of movement in Cash to movement in Net Debt
€€
Increase/Decrease in cash
Cash used to increase liquid resources (withdrawals from liquid resources)
Cash used to repay debentures (Receipt from issue of new debentures/loans)
Change in Net debt
Net debt at 1/1/20XX
Net debt at 31/12/20XX
The Net debt is calculated by:
Total Borrowings(Debentures + Overdraft + other loans)minusCash+Liquid
Resources(Current asset investments)
Note that if the net debt turns out to be a positive calculation then it is referred to as Net
Funds
Abridged Profit and Loss Account
In some Leaving Certificate examination questions students may be asked to prepare an
abridged profit & loss account. The layout of this account is exactly the same as the profit &
loss account. The approach to this question is to work backwards from the profit & loss
balance given in the question. Put in the figures for dividends, taxation, interest, work back to
the operating profit and then continue as normal with the reconciliation of the operating to net
Cashflow from operating activities
Abridged Profit & Loss for the year ended 31/12/20XX
Operating Profit
Interest for the year
Profit before taxation
Taxation for the year
Profit after taxation
Dividends- Interim
-Proposed
Retained profits for the year
Retained profits on 1/1/2009
Retained profits on 31/12/2009

6. Sample Leaving Certificate H/L Question

7. Solution and Marking Scheme

9. Cash flow statement questions can appear on the paper in Section 2 as 100 mark questions as
above or Section 1 for 60 marks as below
60

10. Solution to 60mark Question

11. Profit does not equal cashbecause:
Items affect cash but not profit
 Amounts paid for fixed assets or amounts received from sale of fixed assets
 Amounts paid into or withdrawn from the business by its owners
Items affect profit but not cash
 Non-cash expenses/gains such as depreciation. profit on disposal of fixed asset,
decrease in bad debt provision
 Credit Sales and Credit Purchases
Key Points to remember when doing Cash flow Questions
 Follow the three steps i.e. Prepare a reconciliation of operating profit to net cash
flow from operating activities, the cash flow statement and a reconciliation of
movement in cash to movement in net debt.
 The layout and wording must followed exactly
 Proof your answer by looking at the change in cash