Cash flow

LGD Group: Dark – Lucky – Brad - Grek

Statement of cash flows

08/04/2023LGD Group 2

Contents

1. Overview of cash flows statement1. Purpose of cash flows statement

2. Usefulness of cash flows statement

3. Cash flow activities

2. Preparation of the statement1. Direct method

2. Indirect method

3. Cash accounting vs accrual accounting

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Overview of cash flows statement

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What is cash flows statement?*Reflect the financial condition of the business

*Represent cash receipts and payments for the period

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Purpose of cash flows statement*Provide a summary of cash inflows and outflows

*Help users understand how transactions affect the cash of business

*Based on CFS, managers can make adjustments to operating, investing or financing activities

*Predict future cash flows

*Justify the liquidity of the business and its ability to pay the debts, especially in short term or dividends

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Usefulness of cash flows statement*Assessing the ability to generate cash

*Allows users to compare the cash flows both internally and externally of a business

*Useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices.

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Cash flow activities

Operating

Investing

Financing

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Preparation of a cash flows statement

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Direct method

*The information is taken from accounting records

*Produce the same result with indirect method. Only the operating activities presentation is different.

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Statement of Cash FlowsCash flows from operating activities

Receipts:

Collections from customers

Total cash receipts

Payments:

To suppliers

To employees

For interest and income taxes

Total cash payments

Net cash from operating activities

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Statement of Cash Flows (Cont’)Cash flows from financing activities

Receipts:

Issue shares

Loan borrowing

Total cash receipts

Payments:

Dividends

Total cash payments

Net cash from financing activities

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Statement of Cash Flows (Cont’)Cash flows from investing activities

Receipts

Sale of equipment/vehicles/land/etc.

Interest/Dividends received

Total cash receipts

Payments:

Purchase of equipment/vehicles/land/etc.

Total cash payments

Net cash from investing activities

Net cash from operating activities

Net cash from financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

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Cash flows from operating activities  $  $

Receipts from customers 5,000,000

Interest received 505,000 

Cash paid to suppliers and employees (1,900,000)  

Cash generated from operations 3,605,000 

Interest paid (150,000) 

 Income taxes paid (350,000)

Net cash flows from operating activities   3,105,000

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Cash flows from investing activities    

Purchase of property, plant, and equipment (500,000) 

Proceeds from sale of equipment 35,000 

Net cash flows from investing activities   (465,000)

Cash flows from financing activities    

Proceeds from issue of common stock 150,000 

Proceeds from issuance of long-term debt 175,000 

Dividends paid (45,000) 

Net cash flows from financing activities   280,000

Net increase in cash and cash equivalents   2,920,000

Cash and cash equivalents at beginning of period

  2,080,000

Cash and cash equivalents at end of period   $5,000,000

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Indirect method

*The indirect method is the most common format for the statement of cash flow.

*There are more details than the cash flow statement in direct method.

*The net profit or loss for the period is adjusted

*The items in statements are shown being added or subtracted as following:

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Current Asset

Cash

Current Asset

Cash

Current Liabilities

Cash

Current Liabilities

Cash

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Statement of Cash FlowsCash flows from operating activities

Profit before interest and tax

Add depreciation

Loss (profit) on sale of non - current assets

(Increase)/Decrease in invetories

(Increase)/Decrease in receivables

Increase/(Decrease) in payables

Cash generated from operation

Interest paid

Income tax paid

Net cash flows from operating activities

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Statement of Cash Flows (Cont’)Cash flows from financing activities

Receipts:

Issue shares

Loan borrowing

Total cash receipts

Payments:

Dividends

Total cash payments

Net cash from financing activities

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Statement of Cash Flows (Cont’)Cash flows from investing activities

Receipts

Sale of equipment/vehicles/land/etc.

Interest/Dividends received

Total cash receipts

Payments:

Purchase of equipment/vehicles/land/etc.

Total cash payments

Net cash from investing activities

Net cash from operating activities

Net cash from financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

08/04/2023LGD Group 22

Cash flows from operating activities  $  $

Net income before tax  3,500,000

Adjustments for:    

Depreciation and amortization 125,000  

Provision for losses on accounts receivable 20,000 

Gain on sale of facility (65,000)

Increase in trade receivables (250,000) 

Decrease in inventories 325,000 

Decrease in trade payables (50,000)

Interest paid (150,000)

Income taxes paid (350,000)

Net cash flows from operating activities   3,105,000

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Cash flows from investing activities  $ $ 

Purchase of property, plant, and equipment (500,000) 

Proceeds from sale of equipment 35,000 

Net cash flows from investing activities   (465,000)

Cash flows from financing activities    

Proceeds from issue of common stock 150,000 

Proceeds from issuance of long-term debt 175,000 

Dividends paid (45,000) 

Net cash flows from financing activities   280,000

Net increase in cash and cash equivalents   2,920,000

Cash and cash equivalents at beginning of period

  2,080,000

Cash and cash equivalents at end of period   $5,000,000

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Cash accounting vs accrual accounting

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Cash basis*The expense and

revenue won’t be recorded till cash goes in or out.

Accrual basis*The expense and

revenue will be recorded as soon as the expense is incurred or sales is made

Cash basis vs accrual basis

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Cash basis vs accrual basis*Over the entire life of the business, the total

income will be the same.

*The advantages of each method are the disadvantages of the other one.

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Cash basis

*Advantages

*Provide the actual picture of the cash on hand

*Better comparison of results of different companies

*Satisfies the needs of the users better

*Forecasting is easier

*Can reduce tax for some periods when the cash is not actually paid

*Disadvantages

*Misleading the real situation of the business in term of revenue and expense

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Accrual basis

*Advantages

*Match revenue and expense, provide a better understanding for users of the current situation of business in term of profitability

*Disadvantages

*Cash tracking cannot be seen clearly

*Company can have a lot revenue but short in cash

*Too much on credit sales can result in irrecoverable debts

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Consideration

*Smaller companies tend to choose cash basis, since it deals with daily transactions rather than on credit. The method is easier to prepare and the situation of the business can have high accuracy

*Companies with over $5 million gross receipts have to use accrual accounting. Nevertheless, bigger companies tend to deal with credit transactions more often; and the accrual basis can be used to compare periods to periods actual sales and expenses

Thanks for listening

Questions?