Cash flows statement

Lecture notes

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PART 1 – CFS BACKGROUND
Primary objective of SCF
 Provide relevant information about the
cash receipts and cash payments of an
entity during a period
Usage of information provided in a SCF
 a. Assess the entity’s ability to generate positive future net
cash flows
 b. Assess the entity’s ability to meet its obligations, its ability to
pay dividends, and its needs for external financing
 c. Assess the reasons for differences between net income and
associated cash receipts and payments
 d. Assess the effects on an entity’s financial position of both its
cash and noncash investing and financing transactions during
the period.
 ―PROFILE‖ OF CFS
 Previous name: "flow of funds”
 1863: Dowlais Iron Company - published new financial statement that was
called a comparison balance sheet - explain why there were no funds to
invest.
 1973, the Financial Accounting Standards Board (FASB) defined rules that
report sources and uses of funds but not clear.
 1987, FASB Statement No. 95 (FAS 95) mandated that firms provide cash
flow statements.
 1992, the International Accounting Standards Board (IASB) issued
International Accounting Standard 7 (IAS 7), Cash Flow Statement, which
became effective in 1994.
Basis for cf statements

1. Cash flow statement originated from US  US GAAP

format first, IFRS format later;
2. CF stmt is actually Income Statement prepared under
Cash basis (normal IS is generally under Accrual
basis);
3. Must-have documents in order to prepare CF stmt:
 - Comparative SFP,
 - IS of current year,
 - Additional information.
 Basis for cf statements
4. Differentiate 3 types of cash flows:

Operating CF Investing CF Financing CF

• IS items • Changes in • Changes in

• Changes in CA NCA (including NCL and
and CL Changes in Equity
dòng tiền hoạt động Long term
Investments)

total movement of CF in a period = OCF + ICF + FCF

 BASIS FOR CF STATEMENTS

5. Order of Presentation:
Direct Method
1. Operating CF.
Indirect Method

2. Investing CF.
Direct Method
3. Financing CF.
LO 2
Format of SCF/your aim in this chapter

1. OCF (direct or indirect method)

2. ICF (direct method)
3. FCF (direct method)
4. Δ or δ of Cash &cash equivalents = OCF + ICF+ FCF (finish explaining the
movements of cash and cash equivalents during the fiscal year)
5. Additional Notes: sự biến động của tiền và tương đương tiền
Noncash investing and financing activities
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 Significant Non-Cash Activities
1. Direct issuance of ordinary shares to purchase assets.
trái phiếu
2. Conversion of bonds into ordinary shares.
3. Direct issuance of debt to purchase assets.
4. Exchanges of plant assets.
Companies report significant financing and investing activities that do not affect cash in
either a
• Supplementary schedule (bottom on the statement) or
• Separate note to the financial statements.
-- disclose information

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LO 1
Basis for cf statements

6. Types of dividends in Corporations:

Cash Property Shares/Scrips

I do care I don’t care  I don’t care
 Basis for cf statements
 7A. 3 important dates in Cash Dividends:

công bố chia cổ tức lên danh sách nhận cổ tức trả cổ tức
Date of Declaration Date of Record Date of Payment
Record liability No entry Record payment of
for dividend. required. cash to stockholders.

Dr Retained earnings Dr Dividends payable


Cr Dividends payable Cr Cash
 7B/ SHARE DIVIDENDS

13
 Disposal entry for PPE/Intangibles
8. Disposal entry for PPE/Intangibles
Dr Cash
Dr Accum Depre
(Dr Loss on Disposal of PPE/Intangibles)
Cr PPE – at cost
(Cr Gain on Disposal of PPE/Intangibles)

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 Disposal entry for PPE/Intangibles
9. Retirement entry for Bonds:
Dr Bonds – at amortised cost (carrying amount of bonds at retiring)
(Dr Loss on retiring of bonds)
Cr Cash
(Cr Gain on on retiring of bonds)

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US GAAP format
OVERVIEW
NET INCOME IN ACCRUAL-BASIS

ADJUSTMENTS FOR:
1/ Non-cash items
2/ Non-operating items
3/ Changes in CA and CL

NET INCOME IN CASH-BASIS =

CASH RECEIPTS – CASH PAYMENTS =
NET OPERATING CASH FLOWS
STEP BY STEP – OCF INDIRECT METHODS
Step 1: read SFP, identify CA, CL could be used in
computing OCF calculate changes in CA and CL
Step 2: read Additional information and apply formula:
Net income accrual basic x
(1) Adjust for non-cash items:
Depreciation ex/Amortisation ex/Depletion ex x
Bad debts ex x sang
Impairment loss x
Gains/losses on foreign exchanges (x)/x
(2) Adjust for non-operating items:
Gain/Loss from retiring of bonds (x)/x
Gain/Loss from disposal of NCA (PPE/Intangibles) (x)/x
(3) Adjust for changes in CA and CL:
 Inventories Increase -/Decrease +
 AR Increase -/Decrease +
 Prepayments Increase -/Decrease + Interest paid
……. for borrowings
 AP Increase +/Decrease -
 Interest payable Increase +/Decrease -
 Income tax payable Increase +/Decrease -
………
= Net OCF cash basic
ICF AND FCF – DIRECT METHODS

1. Checking all relevant T-accounts (fully

explained/not fully explained)
2. Making journal entries, focus for those with Cash
3. List direct cash receipts or cash payments for ICF
and FCF
- Where Dr Cash: means Cash receipts
- Where Cr Cash: means Cash payments
 ICF AND FCF – DIRECT METHODS
PRESENTATION:
Investing cash flows: (analysing mostly Intangibles, PPE, Investments)
─ Cash paid for purchasing PPE
─ Cash paid for purchasing Intangibles Interest
─ Cash receipts from sale PPE received from
─ Cash receipts from sale Intangibles investments
─ Cash receipts from interest
─ Net ICF
Financing cash flows: (analyzing Borrowings, SC, SP, Preference share, RE)
─ Cash receipts from borrowings (retiring bonds, paying debts…)
─ Cash receipts from issuing preference shares
─ Cash paid for dividends
─ Cash receipts from additional share issues
─ Net FCF
OCF – DIRECT METHOD (US GAAP)

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STEP BY STEP – OCF DIRECT METHODS

 T – accounts analysis for all operating cycles in the

company:
1. Sales – AR – Cash
2. Cash – AP – MI – COGS
3. Cash – Prepaid Ex/Payables – Operating
expenses
4. Cash – Interest payable – Interest ex
5. Cash – Income tax payable – Income tax ex
 DIRECT FORMAT OF OCF
 Present direct OCF:
─ Cash receipts from sales/AR:
─ Cash payment for purchasing Inventory (through AP
and COGS)
─ Cash payment for operating ex
─ Cash payment for interest
─ Cash payment for tax
─ Net OCF
(ICF, FCF the same)
ILLUSTRATION - OCF DIRECT METHOD
Excel file

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 FREE CASH FLOWS
Free cash flow describes the net cash provided by
operating activities after adjustment for capital expenditures
and dividends.

invest in new plant assets just to

maintain the current level of operations
Using Free Cash Flows to Evaluate a
Company Illustration (1 of 2)
Anheuser-Busch InBev
Statement of Cash Flows (partial)
Cash provided by operating activities $17,451
Cash flows from investing activities
Additions to property and equipment and intangibles $ (3,869)

Purchases of non-controlling interests (99)

Sale of property, plant, and equipment 4,002
Acquisitions of companies (17,439)
Other 7,124
Cash used by investing activities (10,281)
Cash paid for dividends (6,253)

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 Using Free Cash Flows to Evaluate a
Company Illustration (2 of 2)
The company generated a significant amount of cash from its
operations, but it spent most of it to buy property, plant, and
equipment, and to pay dividends.
Cash provided by operating activities $ 17,451
Less: Expenditures on property and equipment 3,869
Dividends paid 6,253
Free cash flow $ 7,329

28 Copyright ©2019 John Wiley & Son, Inc.

LO 3
Q&A
 Negative OCF, ICF, FCF?
 As big/positive as possible?
 OCF and Free CF?
DO IT! 3: Free Cash Flow
Luó Ltd. issued the following statement of cash flows for 2020. (a) Compute
free cash flow for Luó. (b) Explain why free cash flow often provides better
information than “Net cash provided by operating activities.”
Luó Ltd.
Statement of Cash Flows—Indirect Method
For the Year Ended December 31, 2020
(¥ in thousands)
Cash flows from operating activities:
Net income ¥19,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation expense ¥8,100
Loss on disposal of plant assets 1,300
Decrease in accounts receivable 6,900
Increase in inventory (4,000)
Decrease in accounts payable (2,000) 10,300
Net cash provided by operating activities 29,300
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LO 3
DO IT! 3: Free Cash Flow
Luó Ltd.
Statement of Cash Flows—Indirect Method
For the Year Ended December 31, 2020
(¥ in thousands)
Cash flows from investing activities:
Sale of investments 1,100
Purchase of equipment (19,000)
Net cash used by investing activities (17,900)
Cash flows from financing activities:
Issuance of ordinary shares 10,000
Payment on long-term note payable (5,000)
Payment of dividends (9,000)
Net cash used by financing activities (4,000)
Net increase in cash 7,400
Cash at beginning of year 10,000
Cash at end of year ¥ 17,400
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 DO IT! 3: Free Cash Flow Solution
a. Free cash flow (¥ in thousands) = ¥29,300 - ¥19,000 - ¥9,000 =
¥1,300.
b. Net cash provided by operating activities fails to take into
account that a company must invest in new plant assets just to
maintain the current level of operations. Companies must also
maintain dividends at current levels to satisfy investors. The
measurement of free cash flow provides additional insight
regarding a company’s cash-generating ability.

32 Copyright ©2019 John Wiley & Son, Inc.

LO 3
PART 2: ADVANCED CFS - IFRS FORMAT (IAS 7)
FOR CORPORATIONS APPLYING IFRS
(INTERNATION FINANCIAL REPORTING STANDARDS)
PROFIT BEFORE TAX x
(1) Adjust for non-cash items:
Depreciation ex x
Amortisation ex (Depletion ex) x OCF – INDIRECT METHOD
Bad debts ex x
Impairment loss x (IFRS)
Gains/losses on foreign exchanges (x)/x
FINANCE COST (INTEREST EX) x
(2) Adjust for non-operating items:
INVESTMENT INCOME x
Gain/Loss from retiring of bonds (x)/x
Gain/Loss from disposal of NCA (PPE/Intangibles) (x)/x
(3) Adjust for changes in CA and CL:
 Inventories Increase -/Decrease +
 AR Increase -/Decrease +
 Prepayments Increase -/Decrease + (and more CA ….)
 AP Increase +/Decrease – (and more CL: salaries payable, accruals (other payables…))
 Interest payable Increase +/Decrease -
 Income tax payable Increase +/Decrease -
Cash from operations
# Interest paid
# Tax paid
Net OCF
 ICF AND FCF – DIRECT METHODS
PRESENTATION:
Investing cash flows: (analysing mostly Intangibles, PPE, Investments)
─ Cash paid for purchasing PPE
─ Cash paid for purchasing Intangibles Interest
─ Cash receipts from sale PPE received from
─ Cash receipts from sale Intangibles investments
─ Cash receipts from interest
─ Net ICF
Financing cash flows: (analyzing Borrowings, SC, SP, Preference share, RE)
─ Cash receipts from borrowings (retiring bonds, paying debts…)
─ Cash receipts from issuing preference shares
─ Cash paid for dividends
─ Cash receipts from additional share issues
─ Net FCF
BASIS FOR CFS UNDER IFRS – STOCK ISSUES

1. Issue stock at par value:

Dr Cash
Cr Share Capital
2. Issue stock at premium:
Dr Cash
Cr Share Capital
Cr Share Premium
3. Definitions should be differentiated:
ꟷ Stock authorized issued (von duoc phep phat hanh)
ꟷ Stock called – up (von thuc te goi: Dr Cash/Cr SC)
ꟷ Stock paid – up (von da gop du, phan chua gop du treo o Other
Receivables)
4. Bonus issues vs Rights issues
BASIS FOR CFS UNDER IFRS –
BONUS ISSUES AND RIGHTS ISSUES
Rights issues Bonus issues

Shares available to existing shareholders equal to their These are shares issued by the company to the existing
holdings which can be bought at a discounted price for shareholders in specific proportion of their holdings,
a definite period of time. free of cost.

Created out of accumulated profits and

These are additional shares created
reserves.

To bring the market price of the shares within

To raise new/fresh capital for the company.
attractive ranges.

Bonus issues = Scrip Issues = Capitalization

issues
BASIS FOR CFS UNDER IFRS –
BONUS ISSUES AND RIGHTS ISSUES
Rights issues Bonus issues

A company declares a 2 for 5 bonus

A company declares a 1 for 5 rights issues to existing shareholders- 5 old
issues to existing shareholders- 5 shares get 2 new free shares.
existing shares held/old shares are
offered in exchanging for 1 new shares.
BASIS FOR CFS UNDER IFRS –
BONUS ISSUES AND RIGHTS ISSUES

Rights issues
• Dr Cash
• Cr Share Capital
• Cr Share Premium

Bonus issues
• Dr Share Premium/Retained earnings
• Cr Share Capital
BASIS FOR CFS UNDER IFRS – OTHERS
5. Impairment loss recognition:
Dr Impairment loss
Cr PPE/Intangibles/Investments/Accumulated impairment loss
6. PPE and Intangibles – presentation:
 1 line only: PPE/Intangibles – Net book value/Net carrying amount
 3 lines included:
-PPE/Intangibles at cost;
-Accummulated Depre/Amor;
- Accummulated Impairment loss
- NBV (net book value)/Carrrying amount

7. Depreciation Ex and Amortisation Ex are separated.

BASIS FOR CFS UNDER IFRS – OTHERS
8. In all cases: Investments belong to ICF (both ST and LT investments) except for the
case when data clearly given: ST Investment is Cash Equivalents.
9. You should started your Indirect method with: PBT (profit before tax) b/c u have to
separate the 2 cash flows below:
- Tax paid
- Interest paid
10. Bank overdraft under US GAAP is FCF; Bank overdraft under IFRS is Cash
Equivalent.
11. Borrowings: All short-term and long-term borrowings are combined into 1 Borrowing
account and Analyzed under FCF.
12. Income statements: always presented in brief form. We have to look carefully at
Notes (additional info) to retrieve the detailed info of each accounts.
13. Classification differences for interest and dividends:
Consistency in class:
Interest paid, Tax paid: OCF
Dividends paid: FCF
Interest received, Dividends received: ICF
Combination
of Direct and
Indirect
method
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