Slide 5- provides users info about where the cash was coming from and where it is going
how it was being applied
Summarises the flows of cash during the period
Less agency (Estimation, choice, judgement) issues
Operating-day to day core activities of the bs
Without having to rely on external sources (borrowing and investing from shareholders)-
because operating activities generate cash from customers, customers that may come back a
second time, customers that don’t need to be repaid, customers that don’t have a required
rate of return
Other rev.- rent, royalties, etc
Suppliers of labour, accommodation (landlord), suppliers of utilities
Payments relating to employee entitlements- provisions, accruing for the last nine years
Payments to suppliers and employees can be disaggregated
Cash generated from operations- so is calculated by analysts themselves
Profit/loss- i.e., income and expenses
But also includes cash flows linked to inventory (although inventory is an asset it is also a
part of operating activities- buying and selling to generate revenue. E.g, trade payables cash
flows, cash flows from trade receivables any credit payments or receivables that lead to a
cash flow)
The greater value more likely entity will be able to sustain their own operations without
external finance
Investing not short term activities (short-term ones like cash flows linked to inventory and
receivables are operating activities)
Long-term assets are non-current assets PPE, intangible assets, other businesses; but it
also includes other investments like a 5 year term deposit (6 month term deposit is a cash
equivalent short-term, but 5 years is an investment)
So any amount of money into a 5 year term deposit is a cash outflow of that investing
activity. When the deposit matures, the inflow back into the firm’s account would be seen as
an investing inflow.
Proceeds from the disposal (not the gain profit from the realised gain. E.g., 20 k worth of
PPE sold for 25 k. Profit gain of 5 k ; Cash inflow 25 k)
Significance of distinguishing e.g., putting money into a three moth interest-bearing
account (still a cash equivalent not cash flow). Whereas putting it in a longer-term investing
account is a cash flow of an investing activity.
Loaning outflow; Repayment inflow
Payments to acquire PPE, intangible assets, other businesses, long term cash investments
Proceeds from disposal of PPE, maturity of long-term investments
Investing in new assets would be a lot more costly than the proceeds earned from selling it
at the end of its life (which is typically just a small percent of its original cost). Positive cash
flow indicates that the entity is selling off their non-current assetsreducing the future
productive capacity
NCF from operating- NCF from investment (but, some analysts take only investing outflows)
Positive FCF should be greater than the negative investing cash flow
Finance- interest-bearing/non-current liabilities like borrowing, share issues. Only
contributed eq. is affected not reserves (these are simply movements in cash, retained
earnings which are already included in SOFP/L or unrealised gains)
Repayments of only principal not the interest
Itemising all major classes of financial activities
Interest/dividends received and interest paid- leaning towards operating
Dividends paid- leaning towards financing
Interest received- investing/operating
Interest paid- financing/operating
Cash flows under CA- Receipts from trade receivables, cash flows linked to inventory
purchases & prepayments
Cash flows for CL- Payments for trade and other payables, payments for accruals
Interest-bearing liabilities- Borrowings, lease, debentures issued
Provisions- linked to expenses, so are operating cash flows
Dividends paid- choice as operating activity too
Components of cash and cash equivalents & a reconciliation with the SoFPoS- note
disclosures
125.6 is not necessarily a worse outcome still maintains a positive cash flow, small fall in
NCF
Interest received not revenue (revenue is used only on P/L statement)
JB hi-fi net their overdrafts off; Harvey Norman treats their overdrafts as a liability not
asset
So, cash and cash equivalents at end in SoCF may not necessarily reconcile with SoFPoS
depends on if there are overdrafts (if no overdrafts or if they are offset they will reconcile,
but if the overdrafts are liabilities they won’t reconcile).
Non-cash investing activities:
PPE through borrowings (asset and liability worth 100 million; not revenue, expenses or cash
flow added in notes)
Depreciation, amortisation and impairment never cash flows, only expenses
EBITDA- Earnings before, interest, tax, depreciation and amortisation
If EBITDA and operating cash flows are close there haven’t been much accruals,
prepayments and provisions
Earnings quality suggests if there have been many estimations, choices and judgements
involved in calculating profits
Depreciation, amortisation and net accruals usually why profit does not reconcile (should
be disclosed as notes)
Usefulness:
Investors & lenders- suggests how debts can be paid off with sufficient cash flows (indicators
of the entity’s sustainability)
Analysis:
+ve operating CF one of the most imp line items in a GPFR
(must be cash generated from operations- CGO; rather than other rev. like
interest/dividend)
Yr 2 negative OCF
Yr 3 no investments, but a lot of borrowings/financing
Yr 4 negative OCF; banks stop lending money (0 financing); only way to obtain cash is by
selling non CA (+ve investing CF), which reduces future productive capacity
Yr 5 negative OCF; Banks aren’t lending money and there are no non CA to sell (o financing
and investing)
If a company does collapse it might have had 2 consecutive periods of negative OCF before
the collapse signal given by the statement of CF but not P/L statement or balance sheet
Case study:
B better cash flow (positive operating, negative investing, positive financing)
But, A could make their cash flow like B (increase operating sales and investing through the
help of a cleaning company. For e.g., they could ask cleaning company to promote their bs to
employees which would increase OCF and investment which is a negative cash flow for the
childcare is a positive OCF for cleaning company as it acts as rev.) need transparency in
how they achieved this.
The cash flow statement typically signals problems before the SoF P/L
Impacts on reported profit= key measure of management performance
Earnings management for stable and predictable results depreciation
Earning management techniques:
Taking a big bath typically done during the change of management
Directors actions of Passed a resolution, discussed their plans with XYZ’s employee union…
these actions constitute a constructive obligation and gives rise to a liability
Change in provision income/expenses as it doesn’t change assets or liabilities
Draft profits seen by directors and can be manipulated to create a potential profit/loss
Reported profits for shareholders
Cash flows can overlap with profits but are not the same