The main function of this statement is to focus on inflows and outflows throughout the business and allows for reports on changes on the financial position of the company making it open for analysis.
There are some transactions that can increase profit but dont affect cash flow:
- Decrease in provision for doubtful debts
- High credit sales
- Accruals of income.
There are transactions that decrease profit and dont effect cash flow:
- Increase in provision for doubtful debts
- Writing off a bad debt
- Low credit sales
- Loss on disposal of NCA
- Accrual of expense
No effect on profit but effect cash flow
Decrease cash flow:
- High payments to trade payables
- Low collection from trade receivables
- Repaying a loan
- Paying dividends
- Purchase of NCA
- prepayment of expense
Increase cash flow:
- Delaying payments to trade payables
- High collection of debts to trade receivables
- Recieving a loan
- selling shares
- Sale of NCA
- Prepayments of income
There are 3 sections: Operating activities, investing activities and financing activities.
Loss/profit from sale of NCA
trade receivables (increase)/decrease
trade payables increase/(decrease)
= cash flow from operations
LESS interest paid
LESS tax paid
= net cash flow
This part may be the only part you are asked to produce...
investing and financing
Investing activities: £
purchases of NCA
Cash from selling shares
Repayment of shares/loans
Net cash flow
The last part of the cash flow statement is the Net cash flow.
Net increase/(decrease) in cash flow from cash and equivalents
+Cash and equivalents at the beginning if the year
= Cash and equivalents at the end of the year
These should equal the bank balance at the end.
Why is the Cash flow statement important?
- It provides additional information to shareholders to the income statement and balance sheet
- It relates to the cash flow position and changes in it which is important to the survival/growth of the business.
- Explains why the profit figure is different to the cash and equivalents figure.
The exam could ask questions like analyse the position of the business based on its cash flow, here are some things to include:
Look at purchase of non current assets... if they have purchased more, could this mean the business is expanding?
Look at the shares issued: if they have a surplus of money the business again looks like it could be expanding.
Can the business afford to pay its dividends?
Does the inflows cover the outflows?
Is there something like loan interest that is making the business spend a lot of money?