Cash flow reporting and analysis
REVISED BY DR SIMONA SCARPARO (FEBRUARY 2013). EARLIER R E V I S E D B Y D R G U S H O S S A R I ( J A N U A R Y 2 0 1 0 ) , B A S E D O N O R I G I N A L M AT E R I A L P R E PA R E D BY GARRY CARNEGIE, GRAEME W INE, CHRISTINE JUBB AND JUDY
Lectures 5 & 6: Introduction
Importance of cash flow information
Enhancing predictions of possible future cash flows
Explaining the relationship between profit and cash flows
Evaluating m anagem ent perform ance
Cash flow format
Deriving cash flow information
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net cash flow
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Financial Reporting and Analysis
Lectures 5 & 6: I ntr oducti on
W hile the statem ent of comprehensive incom e (also known as the incom e statem ent) and the statem ent of financial position (also known as the balance sheet) reveal m uch about the past, present and even the future of the firm ; there is – nevertheless – inform ation that is not clearly revealed in these two statem ents. For exam ple, while overall changes in net assets m ight be associated with profit or loss for the period, the reasons for specific changes in the balance of cash at period end are not clear. Likewise, while the statem ent of com prehensive incom e reveals the operating result for the period, it does not show the relative im pact of non-cash transactions such as credit sales and accrued expenses on this result. Further, neither of these two statem ents show other aspects of the entity’s setup and operations, such as whether the m ajority of the entity’s cash cam e from core operations, or whether the entity had to sell som e of its non-current assets to keep its bank balance at an appropriate level. It would be useful to know whether the entity required additional cash funds during the period, whether these cam e from external or internal sources, and whether these funds were used for expansion, to repay existing debt, or m erely to m aintain the entity’s existing level of operations. In order to address these issues, an additional financial statem ent, the statem ent of cash flows (also known as the cash flow statem ent), is needed; this statem ent provides the focus for this topic. W e exam ine the role and purpose of the statem ent of cash flows for business m anagers. W e also consider the preparation of the statem ent of cash flows and explore fundam ental reasons why cash flows and profit (where profit is prepared according to accrual accounting principles) m ight differ in any particular period. W e conclude the topic by introducing basic principles that m ay be used to analyse the inform ation typically reported in the statem ent of cash flows.
W hen you have com pleted this topic you should be able to:
Outline the general im portance of cash flow inform ation for business, and the particular im portance of cash flows to the survival of the business.
Distinguish between profit and cash flow.
Outline the general requirem ents of the accounting standard covering the preparation of the statem ent of cash flows.
Apply financial analysis techniques that use cash flow inform ation to assess the operating, investing and financing activities, as well as the future viability of the business.
L e ar ni n g r es o ur ce s
Bazley, M, & Hancock, P 2013, Contemporary accounting, 8th edn, Cengage Learning, South Melbourne, ch. 11.
TOPI C 3
Australian Accounting Standards...