Lecture

Presented by
Lecia Allen MSc. BSc., Teaching Dip.,
 A part of the Financial Statements of on
organisation that reports the cash receipts,
cash payments and net changes in cash
resulting from operating, investing and
financing activities during a period.

 It indicates where cash came from and how it

was used during the year.
 Necessary because the Income Statement and the
Balance Sheet provide only limited information-
no detailed summary of where cash came from
and how it was used.

 Income Statement – shows net income but not

the cash generated from operating activities

 Comparative Balance Sheets – show

increase/decrease in the balance sheet elements
but not how these came about.
 Information presented help investors,
creditors and others to assess:

1. The entity’s ability to generate future cash

flows

2. The entity’s ability to pay dividends and

meet obligations
3 The reasons for the difference between net
income and net cash provided by operating
activities

4 The cash investing and financing

transactions during the period
1. Operating activities – the cash effects of
transactions that create revenues and
expenses – transactions that determine net
income

2. Investing activities – the cash effects of

acquiring and disposing of investments,
property, plant and equipment as well as
lending money and receiving repayment.
3. Financing activities – obtaining cash from
issuing debt and repaying the amounts
borrowed and obtaining cash from issue of
shares and providing them with a return on
their investment.
 Operating Activities – Income Statement items
 Cash inflows:
◦ From the sale of goods/services
◦ From returns on loans (interest)
◦ From returns on equity (dividends)

Cash outflows:
◦ To suppliers for inventory
◦ To employees for services
◦ To government for taxes
◦ To lenders for interest
◦ To others for expenses
 Investing Activities- changes in non-current
assets
 Cash Inflows

◦ From sale of property plant and equipment

◦ From sale of debt or equity securities
◦ From collection of principal on loan to others

Cash Outflows
◦ To purchase property, plant & equipment
◦ To purchase debt or equity securities
◦ To make loans to others
 Financing Activities – Changes in long-term
liabilities and stockholders’ equity

 Cash inflows
o From sale of stock
o From issuance of debt (bonds & notes)

Cash outflows
◦ To stockholders as dividends
◦ To redeem long-term debt or re-acquire capital
stock
 Non-cash activities are not included in the Statement
of Cash Flows. Where they are included in any figure
required to determine cash flows, adjustments are
made to eliminate them.

 Some non cash items include:

 Issuance of common stock to purchase assets

 Conversion of bonds into common stock
 Issuance of debt to purchase assets
 Exchanges of plant assets
 Depreciation
 Gain/loss on sale of assets
 NB – Significant financing and investing
activities that do not affect cash are reported
in either:

 1. a separate schedule at the bottom of the

statement or,

 2. in a separate note or supplementary

schedule in the financial statement.
 1. Comparative Balance Sheets

 2. Current Income Statement

 3. Additional information – eg. transaction

data needed to provide data as to how cash
was provided or used during the period.
In order to find net cash provided/used by
operating activities, the net income must be
converted from an accruals to a cash basis.

The two methods generally used are:

1. the direct method
2. the indirect method
 Decrease in current assets xxx
Increase in current assets (xxx)
Decrease in current liabilities (xxx)
Increase in current liabilities xxx xxx
Net cash provided by operating activities xxx

Cash flows from investing activities

Purchase of fixed assets (xxx)
Sale of fixed assets xxx
Purchase of debt or equity securities (xxx)
Loan to others (xxx)
Collection of loan principal xxx

Net cash used by investing activities xxx

Cash flows from financing activities
Issuance of stocks xxx
Issuance of bonds xxx
Payments of dividends (xxx)
Redemption of long-term loans (xxx)
Re-acquisition of capital stock (xxx)
Net cash used by financing activities xxx
Net increase/decrease in cash xxx
Cash at beginning of period xxx
Cash at end of period xxx
 This is the cash remaining from operations
after adjustment for capital expenditures and
dividends.

This analysis is done to give a better insight

into the cash generating ability of the
company as a company must invest in new
fixed assets and must at least maintain
dividends at current levels.
Free Cash flow = Cash provided by - Capital expenditures
operations & dividends