1. ram@2013
lesson notes on
STATEMENT OF CASH FLOW
RM Accounts Ed
1

2. RATIONALE….
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 Companies generally measure their income on an
accrual basis.
 The accrual basis in advertently fails to establish the
company’s ability to generate cash.
 The SOCF seeks to give a clearer picture /better
understanding of the movement of cash (cash
equivalents) within the company.
RM Accounts Ed
ram@2013

3. USEFULNESS…
3
 Assess the ability to generate positive net cash flows
 Assess the ability to service loans and pay dividends
 Explain changes in the cash position (open
 Examine cash investing and financing activities
RM Accounts Ed
ram@2013
)
- end balances

4. INDIRECT METHOD (IAS 7)
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Seeks to adjust the accrual based
net income in order to reflect the
cash receipts for the period.
RM Accounts Ed
ram@2013

5. SOCF
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 Is based on the net difference between cash inflows
and cash outflows.
 It is broken into three (3) distinct components
 OPERATING
ACTIVITIES
 FINANCING ACTIVITIES
 INVESTING ACTIVITIES
RM Accounts Ed
ram@2013

6. OPERATING ACTIVITIES
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 The principle revenue producing activities (and such
that do not include financing or investing).
 Those activities that have an effect on the income
statement.
 They are examined through changes to the firm’s
current assets and current liabilities; as well as
reversal of non-cash actions on the income.
RM Accounts Ed
ram@2013

7. INVETSING ACTIVITIES
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 The acquisition and/or disposal of long-term assets
and other investments (excluding cash).
 It involves the purchase of fixed assets for cash; as
well as the disposal of fixed assets for cash.
 It includes (cash) loans made; or the payment of
interest and/or principle; as well as interest received
on the loans or other investments.
RM Accounts Ed
ram@2013

8. FINANCING ACTIVITIES
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 Those activities that result in changes in the
composition and /or size of the firm’s capital and
borrowings.
 The activities that include resources borrowed and
the repayment of resources borrowed.
RM Accounts Ed
ram@2013

9. SOCF can help identify if there is….
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 Sufficient cash to meet short term demand
 Sufficient profit to finance its operations
 Future opportunities for more cash flows
 Liquidity to pay current debts
 Necessity to offer additional shares or new capital
The Statement of Cash Flow is a legal requirement
for public companies.
RM Accounts Ed
ram@2013

10. ram@2013
lesson notes on
PREPARING THE CASH FLOW
STATEMENT
RM Accounts Ed
10

11. Step one: cash flow from operating activity
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Identify the profit before interest
and tax (pbit).
Adjust it for non-cash activity and
changes in working capital.
RM Accounts Ed
ram@2013

12. CASH FLOW FROM OPERATING ACTIVITIES
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 Operating Income
 Add/deduct non-cash items
 e.g. Depreciation, loss/gain on disposals
 Adjust for changes in current assets
 Add if the current assets decrease
 Deduct if the current assets increase
 Adjust for changes in current liabilities
 Add if the current liabilities increase
 Deduct if the current liabilities decrease
RM Accounts Ed
ram@2013

13. Step two: cash flow from investing activity
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 Net the short-term servicing of finance.
 Remove the corporation taxes actually paid;
and then…
 Adjust for investing activity in the non-
current assets.
RM Accounts Ed
ram@2013

14. CASH FLOW FROM INVESTING ACTIVITIES
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 Net the servicing of finance
 Add interest received
 Less interest paid
 Extract the corporation tax paid
 Less taxation
 Net the investment in non-current assets
 Add receipts of cash on disposal of assets
 Deduct payments of cash on acquisition of assets
RM Accounts Ed
ram@2013

15. Step three: cash flow from financing activity
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 Net the changes made to the share capital
via cash;
 Net the changes made to the long-term debt
obligations via cash.
RM Accounts Ed
ram@2013

16. CASH FLOW FROM FINANCING ACTIVITIES
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 Net the changes in share capital
 Add issue of shares for cash
 Deduct shares redeemed for cash
 Deduct dividends paid on (own) shares
 Net the changes in long-term debt obligations
 Add issues of long-term debt instruments
 Deduct payments on long-term debt instruments
RM Accounts Ed
ram@2013

17. Step four: change in cash flow
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 Total the sub-categories




Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net change in the cash flow
RM Accounts Ed
ram@2013
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±x
±y
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18. Step five: reconciliation (proof)
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 Demonstrate that the net change in cash is that
reflected on the balance sheet (BS).



Cash amount disclosed at beginning (BS)
Net change in cash flow (see SOCF)
Cash amount disclosed at ending (BS)
RM Accounts Ed
ram@2013
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±z
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