CASH FLOWS

CASH FLOWS

By: Miss Siti Norhidayah Hamid

FRS 107 • Cash Flow Statements requires a cash

flow statement to be presented as integral (memenuhi) part of the financial statements for each period for which the financial statements are presented.

FRS 107 • FRS defines cash flow as ‘ an increase or

decrease in an amount of cash’• It shows the revenue or expense stream

that changes a cash account over a given period

• It also defined as ‘inflows and outflows of cash and cash equivalents (Para 6)

FRS 107 • ‘Cash’ generally comprises cash on hand

and cash in bank (including bank overdraft)

• ‘Cash equivalents’ are short-term, highly liquid investment, which are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value.

Cash equivalents

• Some examples of cash equivalents are short-term fixed deposit and investments in short-term treasury bills.

• In business as in personal finance, cash flows are essential to solvency.

• Cash flow is crucial to an entity's survival.• Having ample cash on hand will ensure

that creditors, employees and others can be paid on time.

• If a business or person does not have enough cash to support its operations, it is said to be insolvent, and a likely candidate for bankruptcy should the insolvency continue.

• The statement of a business's cash flows is often used by analysts to measure financial performance.

• Companies with ample cash on hand are able to invest the cash back into the business in order to generate more cash and profit.

Cash Flow vs. Income

It is important to note the distinction between being profitable and having positive cash flow transactions: just because a company is bringing in cash does not mean it is making a profit (and vice versa)

FRS 107 • Cash inflows usually arise from one of

three activities - Operating activities- Investing activities- Financing activities• Cash outflows result from expenses

or investments

Operating activities• This section measures the cash used or

provided by a company's normal operations. It shows the company's ability to generate consistently positive cash flow from operations.

• Think of "normal operations" as the core business of the company.

• For example, Microsoft's normal operating activity is selling software.

Operating activities (cont.)

• Operating activities are defined as the ‘the principle revenue-producing activities of the enterprise, and other activities that are not investing or financing activities’ (Para 6).

Some examples; cash receipts from sale of goodsCash receipts from rendering of servicesCash receipts from loyalties, commissionCash payments to suppliers of goodsCash payments to employeesCash payments to suppliers of other

services (utilities)

Investing activities

• This area lists all the cash used or provided by the purchase and sale of income-producing assets.

• Are the acquisitions and disposals of long term assets and non-cash-equivalents investment.

Some examples:• Cash payments for the acquisitions and

cash receipts from the sale of fixed assets• Cash payments for the acquisition and cash

receipts from the sale of long term investment (stocks and bonds of other companies, real estate, stock in a company's subsidiaries, and cash that has been set aside for a specific purpose or project)

Financing activities

• This section measures the flow of cash between a firm and its owners and creditors.

• Are activities which result in changes in the size and composition of the equity capital and borrowings of the enterprise.

Some examples:• Cash receipts from the issuance and

cash payments for the redemption of equity (shares) and debt instrument (debentures)

• Cash receipts from other short-term or long term borrowings, and cash repayments of amount borrowed.

CASH FLOW METHOD

•Direct Method•Indirect Method

Direct Method• Direct- requires the disclosure of ‘major

classes of gross cash receipt and gross cash payments)

• Some examples are:- Cash collected from customers- Interest and dividends receives- Cash paid to other employees and other

suppliers- Interest and dividend paid- Other operating cash receipts

Indirect Method• Indirect- the net cash flow from operating

activities is determined by adjusting the net profit of loss for the effects of:

- non-cash items (depreciation)- Items for which the cash effects are investing

or financing cash flow ( profit on sales of fixed assets)

- Changes in the operating working capital (changes in stock, debtors and creditors

balances)

ADVANTAGES & DISADVANTAGE

S

ADVANTAGES (Cont.)

• The profit and loss account sets out the revenue and expense rather than the cash receipts and cash payments for the period.

• When a company makes a sale on credit this will be reflected as an increase in the wealth in the profit and loss account but there is no cash collected.

• Easy to understand

ADVANTAGES (Cont.)

• It shows the cash coming from the operation

• It shows the cash used in the investing activities

• It shows the cash used in the financing activities

Disadvantages

• A statement in which is easier to understand is not necessary more relevant or useful

• Cash flow statements focus on the financing activities of an enterprise rather than the economic or trading activities. Therefore, it did not provide information on either past or future economic performance.

Uses of cash flow statements

• To enable management, investors, and creditors and others to see how the various activities of the company have been financed

(e.g. which activities have net cash outflows and which activities have net cash inflows)

• According to FRS, cash flow statement in conjunction with profit & loss account and balance sheet provides information on financial position and performance as well as liquidity, solvency and financial adaptability

Uses of cash flow statements (Cont.)

• The cash flow statements may useful to management, investors, creditors & others in assessing the enterprise ability to:

- Pay its debts (e.g. loan repayment, trade creditors)

- Pay loan interest, dividends- Decide whether it will need to raise

additional external finance (e.g. issue shares or debentures)

Uses of cash flow statements(Cont.)

• To explain why an enterprise may have a net profit for the year but nevertheless has less cash at the end of the year.

• To allows users to see directly the reasons for the difference between the net profit and its associated cash receipts and payments (e.g. the net cash inflow from operating activities)

PREPARING A PREPARING A CASH FLOW STATEMENTCASH FLOW STATEMENT

Preparing a Cash Flow Statement Preparing a Cash Flow Statement

Outline:Outline:

1.1. DefinitionDefinition

2.2. Differences with an Income StatementDifferences with an Income Statement

3.3. How to use itHow to use it

4.4. StructureStructure

5.5. How to Handle deficitsHow to Handle deficits

6.6. Guide to production and marketing plansGuide to production and marketing plans

7.7. Statement of Cash FlowsStatement of Cash Flows

Definition:Definition:

Is a summary of all cash Is a summary of all cash InflowsInflows and and OutflowsOutflows affecting a affecting a business during a given period of time such as a month, business during a given period of time such as a month, quarter or a year quarter or a year

It can be a statement of past performance or a budget for It can be a statement of past performance or a budget for future plansfuture plans

Past: Cash Flow shows how and when cash was generated Past: Cash Flow shows how and when cash was generated and used and used

Future: Cash Flow is essential for evaluating borrowing Future: Cash Flow is essential for evaluating borrowing needs and repayment capacityneeds and repayment capacity



A comprehensive A comprehensive Cash Flow Cash Flow forces the manager to think forces the manager to think about and make decisions on issues:about and make decisions on issues:

What enterprises and production practices to use next What enterprises and production practices to use next year? year?

How and when to market commodities?How and when to market commodities?

What capital items to purchase or sell?What capital items to purchase or sell?

How to finance capital purchases?How to finance capital purchases?

Will I be able to take a Will I be able to take a vacationvacation??



Cash FlowsCash Flows

Are a blueprint for actions and testing of ideas and Are a blueprint for actions and testing of ideas and decisions on paper before implementing themdecisions on paper before implementing them

AreAre essential for evaluating borrowing needs and essential for evaluating borrowing needs and repayment capacityrepayment capacity



Income Taxes and Non-Farm IncomeIncome Taxes and Non-Farm Income

Included in a complete Cash Flow StatementIncluded in a complete Cash Flow Statement

May not be included in the Income StatementMay not be included in the Income Statement

Cash Withdrawals as Stock Dividends and Family LivingCash Withdrawals as Stock Dividends and Family Living

Usually included in a Cash Flow StatementUsually included in a Cash Flow Statement

Not included on the Income Statement Not included on the Income Statement

Differences with an Income Statement:Differences with an Income Statement:


Debt TransactionsDebt TransactionsCash Flow includes a more complete accounting of debt Cash Flow includes a more complete accounting of debt

transactions by showing principal payments and transactions by showing principal payments and proceeds from new loansproceeds from new loans

An Income Statement only shows interest payments An Income Statement only shows interest payments



TransactionsTransactions

Cash Flow reflects cash transactions such as the purchase Cash Flow reflects cash transactions such as the purchase or sale of capital items like breeding livestock, or sale of capital items like breeding livestock, machinery and real estate machinery and real estate

These transactions are shown on an Income Statement as These transactions are shown on an Income Statement as depreciation, or as a gain or loss from the disposal of depreciation, or as a gain or loss from the disposal of farm assets farm assets




Inventory ChangesInventory Changes

A Cash Flow includes sales and purchases, no adjustments A Cash Flow includes sales and purchases, no adjustments for inventory changesfor inventory changes

An Income Statement prepared using accrual accounting An Income Statement prepared using accrual accounting includes inventory changes. includes inventory changes.

Cash inflows and outflows in Agriculture are not distributed Cash inflows and outflows in Agriculture are not distributed evenly, causing cash deficits and surplusesevenly, causing cash deficits and surpluses

Cash Flows helps us identify those ups and downs in cash so Cash Flows helps us identify those ups and downs in cash so we do not run out of cash. A producer can plan for future we do not run out of cash. A producer can plan for future cash needs rather than reacting with crisis management cash needs rather than reacting with crisis management

When those cash needs are timely identified, a producer may When those cash needs are timely identified, a producer may want to cover them with borrowed money. As a result, a want to cover them with borrowed money. As a result, a Bank will demand a projected Cash Flow to determine if the Bank will demand a projected Cash Flow to determine if the producer is able to meet the financial obligations on timeproducer is able to meet the financial obligations on time


How to Use it:How to Use it:

A projected Cash Flow helps plan a repayment schedule for A projected Cash Flow helps plan a repayment schedule for borrowed fundsborrowed funds

Monitors cash flow variances by comparing actual cash Monitors cash flow variances by comparing actual cash flows with projected cash flowsflows with projected cash flows

Variances between the two indicate the need to make Variances between the two indicate the need to make adjustments and anticipate the problems before they adjustments and anticipate the problems before they become a CRISISbecome a CRISIS


How to Use it:How to Use it:

Preparing a Cash Flow Statement Preparing a Cash Flow Statement Structure:Structure:

Beginning Cash • Cash available at the beginning of the period

Operating Receipts • Cash INFLOWS from business operations. They shall be

recorded in the time period you’ve received or expect to receive the cash• Net amount (less deductions)• Add off-farm income, if appropriate.


Structure:

Operating Expenses

• Cash OUTFLOWS from business operations. They shall be recorded in the time period you’ve paid them or expect to pay

• Include family living, non-farm business expenses and taxes

Cash position

• Difference between cash available and cash required


Structure:

6 Ways6 Ways

• Raise additional cashRaise additional cash

• Reduce or postpone cash paymentsReduce or postpone cash payments

• Restructure the debt to fit the cash flowRestructure the debt to fit the cash flow

• Selling of intermediate or long-term assets Selling of intermediate or long-term assets

• Withdrawals from savings Withdrawals from savings

• Borrow additional moneyBorrow additional money


How to Handle Deficits:How to Handle Deficits:

In order to develop a Cash Flow projection, you must figure out the production and marketing plan for the upcoming year and the associated costs

A Cash Flow plan can be developed to show income from the sale of crops in different months. Those crops can come out from inventory or from new harvest

From each estimate of sale, estimates of the number of units sold and at what price are developed

MARKETING PLAN


Guide to Production and Marketing Plans:Guide to Production and Marketing Plans:

A Cash Flow projection reflects also a plan for crop or livestock production and the expenses associated with such production

A manager must have the production plan in mind to know when the crops needs to be planted, when it will be ready to harvest or even when to A.I. to determine when that income from calf sales is going to be

PRODUCTION PLANThe production, marketing, and financial planning information contained in a Cash Flow can help managers to make better, well-informed management decisions


Guide to Production and Marketing Plans:Guide to Production and Marketing Plans:

DefinitionDefinitionIs a summary of all cash receipts and cash expendituresIs a summary of all cash receipts and cash expenditures

The primary difference with Cash Flow Statement is that the The primary difference with Cash Flow Statement is that the Statement of Cash Flows rearranges information into Statement of Cash Flows rearranges information into operating, investing, and financing activities operating, investing, and financing activities

Its objective:Its objective:

o To help producers and Ag lenders to become more To help producers and Ag lenders to become more businesslike in their approach to financial analysis businesslike in their approach to financial analysis

o To increase the completeness and accuracy of the data To increase the completeness and accuracy of the data used in both management and credit decisionsused in both management and credit decisions


Statement of Cash Flows:Statement of Cash Flows:

Operating ActivitiesOperating ActivitiesInclude the cash flows involved in producing goods and services Include the cash flows involved in producing goods and services •These flows are the cash effects of the transactions that These flows are the cash effects of the transactions that determine net income, including family living cash withdrawals determine net income, including family living cash withdrawals

Investing ActivitiesInvesting ActivitiesFocuses on the cash resulting from the purchases and sales of Focuses on the cash resulting from the purchases and sales of capital assets and non-farm investments. capital assets and non-farm investments. •Cash from cull sales of breeding livestock would be included in Cash from cull sales of breeding livestock would be included in cash received from operations. Breeding stock liquidations or cash received from operations. Breeding stock liquidations or sales in excess of normal culling are also includedsales in excess of normal culling are also included



Financing ActivitiesFinancing ActivitiesFinancial Activities would include the borrowing and Financial Activities would include the borrowing and repaying of loans by a businessrepaying of loans by a business

Financial Activities also includes:Financial Activities also includes:•Obtaining equity funds from owners Obtaining equity funds from owners •Disbursing equity funds to owners Disbursing equity funds to owners •Repaying the principal portion on capital leasesRepaying the principal portion on capital leases



Preparing a Cash Flow Statement Preparing a Cash Flow Statement Statement of Cash Flows:

THANK YOU….

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CASH FLOWS