Projected Cash Flow Statement

The Cash Flow Statement identifies the inflows and outflows of cash during a specific period. The Cash Flow Statement presents the users of financial statements with useful and relevant information, for example, answers to the following

• Was sufficient cash generated from operations to pay the interest charges, dividends and taxation
• How was the expansion financed, etc?

Before we discuss the format of the Cash Flow Statement, we are going to discuss the meaning of certain concepts that are used in the Cash Flow Statement.

Specific Outcomes

At the end of this section you should be able:

To define and explain the following concepts:

• Cash
• Funds
• Investment activities
• Financing activities
• Operating activities
• Cash flows from operating activities
• Cash flows from investing activities
• Cash flow from financing activities

To calculate the following:

• Cash retained from operating activities
• Cash utilised in investment activities
• Cash effects of financing activities

To prepare a cash flow statement that fulfils the requirements of statement ACT118.

Cash

Cash, for the purpose of this statement, is cash at the bank and on hand and any other highly liquid investment that is readily retainable to known amounts of cash.

Funds

Funds can be defined as the financial resources possessed by a company now from transactions concluded by third parties. This means that there can only be a flow of funds if a transaction occurs between the business and a person outside the business. Your main task will be to determine whether there was an inflow or outflow of funds during the past financial year. One can say that the concepts of cash and funds go hand in hand.

Investment Activities

Investment activities are those activities relating to the acquisition and disposal of fixed assets and investments. You are referred to the increase of R50 000 IN Land and Buildings and the decrease of R10 000 in vehicles in the previous example.

What will an increase in investments be?

Example:  Investments = 2008 - 20 000 and 2007 - 10 000

The increase of R 10 000 in investments means that more money was invested in a business outside our business. This means an outflow of funds. The opposite, namely a decrease in investments, will be an inflow of funds.

Financing Activities

Financing activities are those activities that result in changes in the size and composition

Of the debt and capital funding of the business. In other words, the financing activities indicate where the funds were obtained to finance the investment activities and daily operating activities. The increase in R 20 000 in the Ordinary share capital is a good example of financing activity (example to explain the concept of funds).

Will an increase in long term liabilities by an inflow or outflow of funds?

Yes, it will be an inflow of funds because more money is borrowed from outside the business.

Operating Activities

Operating activities include all transactions and other events that are not investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of income.

Examples of these types of activities are:

• Dividends paid for the year
• Taxation paid for the year and
• Interest paid (finance cost) for the year

In our discussion later you will see that the information for operating activities is found in the Income Statement.

Cash Flows From Operating Activities

The cash flows from operating activities represent the first section of the Cashflow Statement. In this section, all those items which have an effect on the determination of income will be taken into account. The following items are involved.

• Investment income for example dividends received
• Financing charges for example interest paid
• Taxation paid
• Dividends paid
• Changes in working capital consist of:
• Increase/decrease in inventory
• Increase/decrease in debtors
• Increase/decrease in creditors
• Profit before taxation adjusted with all the non-cash flow items

What is the meaning of the concept of non-cash flow items?

Non-Cash Flow

items are all those items that have an influence on the profit but that are not a flow of funds because no third party is involved.

The following are examples of non-cash flow items:

• Profit or Loss on disposal of a fixed asset
• Depreciation
• Increase or decrease in the provision for bad debts
• Transfer to reserves

Did you recognise that the majority of the information for this section can be found in the Income Statement? It is only the changes in working capital that are found in the Balance Sheet. Although these changes did not influence the profits directly it must be taken into account in this section because the changes are part of the operating activities of the business.

Cash Flows From Investment Activities

The cash flows from investment activities represent the second section of the Cash Flow Statement.

In this section, all those items which have an effect on the acquisition and disposal of fixed assets and investments will be taken into account. In other words, this section indicates how the funds were utilised to maintain or expand operations

The following items are involved:

• Replacement of fixed assets
• Proceeds on the disposal of fixed assets
• Additions to fixed assets
• Investments purchases
• Investments sold

Did you recognise that the information for this section can be in the notes for plant, machinery and equipment (Fixed assets) and Investments? The comparative figures of the previous year must be taken into account to determine the inflow or outflow of funds. (See our discussion later).

Cash Flows From Financing Activities

The cash flows from financing activities represent the third section of the Cash Flow Statement. In this section, all those items which have an effect on the debt and capital funding of the business, will be taken into account. In other words, this section indicates where the funds were obtained to Finance the investment activities and the daily operating activities.

The following items are involved:

• Increase or decrease in long term borrowings
• Proceeds from the issue of share capital
• Increase in share premium

Did you recognise that the information for this section can be found in the equity and liabilities section of the Balance Sheet? You must determine whether the increase or decreases from the previous year’s figures are an inflow or outflow of funds.

Calculations of Certain Concepts

Before we discuss the format of the Cash Flow Statement according to AC 118 we are first going to discuss how to calculate the following concepts:

• Cash flows from operating activities
• Cash flows from investment activities
• Cash flows from financing activities

To explain the calculations of these concepts only one example will be used.

Click here to view a video that explains the concepts that you need to understand relating to Cash Flow Projections.

Click here to view a video that explains Cash Flow Forecasts.

Click here to learn more about the Projected Cash Flow Statement.

Klik hier om meer te leer oor die Geprojekteerde Kontantvloeistaat.