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Financial Statements:
Adjustments
Trading, Profit & Loss Account
Balance Sheet
Objective
Definition
Cash flow statement: a statement
which shows how cash is generated
& used by business entities
throughout a certain accounting
period.
Where the cash has come from &
exactly what we have done with it
during the year.
Purposes
Profit/loss does not give accurate picture
of the economic position of a business
because some item do not involve cash in
Profit & Loss Account.
Final accounts can be manipulated in
terms of estimations figures but not cash.
Cash flows highlight business with
shortage in cash even though they are
making profits.
Operating activities
Transactions that affect the revenues
& expenses & influence the net
profit/loss of the business.
Involve items in Profit & Loss
Account, current assets & current
liability.
Operating activities
Cash in:
Decrease
CA
Increase
CL
Profits
Cash
flows
from
operati
ng
activitie
s
Cash out:
Increase
CA
Decrease
CL
Losses
Operating activities
Cash in:
Decrease in receivables repayment of
debts
Decrease in inventory sale of inventory
Increase in current liabilities borrow
money (short term loans), borrow money
from creditors/accounts payable
Cash out:
Increase in receivables debtors borrow
money
Increase in inventory buy more inventory
Decrease in current liabilities repay
Investing activities
Acquiring & disposing longterm/non-current assets (FA)
Involve fixed assets
Investing activities
Cash in:
Sale of
FA
Cash
flows
from
investin
g
activiti
es
Cash
out:
Purchas
e of FA
Financing activities
Obtaining cash / repayment of longterm loan from external parties (bank
loans, bonds & debentures) &
issuance of shares
Involve long-term liabilities &
shareholders (or owners) equity.
Financing activities
Cash in:
Introd
uce
capital
Sale of
shares
Recei
ve
Cash
flows
from
financi
ng
activiti
es
Cash out:
Drawi
ngs
Dividends
paid
Paym
ent of
longterm
Construction of cash
flow statements
Two methods: Indirect & Direct
methods
Statement
of cash flows for the year ended
Indirect
method:
Cash flows from operating activities
Net profit
xxx
xxx
xxx
xxx
xxx
xxx
Construction of cash
flow statements
Direct method:
Statement of cash flows for the year
ended
Cash flows from operating
activities
Total cash receipt from operating
xxx
activities
Cash paid from operating activities
xxx
Cash flow from investing activities
xxx
Cash flow from financing activities
xxx
Net increase (decrease) in cash
xxx
Cash balance at the beginning of the
xxx
Example 1
Balance sheet as at 31.12.10 and 31.12.11
31.12.10
31.12.11
Fixed
RM
RM
RM
RM
assets
Premises
25,000
28,800
Current assets
Inventory
12,500
12,850
Receivable
21,650
23,140
s
Cash &
4,300
5,620
bank
38,450
41,160
Less: Current
Example 1
Balance sheet as at 31.12.10 and 31.12.11
31.12.10
31.12.11
Financed
RM
RM
RM
RM
by:
Capital
Add: Net profit
Less: Drawings
52,600
16,550
69,210
17,110
52,100
52,100
25,440
77,540
18,250
59,290
Example 1: Answer
Cash Flow Statement for the year ended
31.12.11
Cash flows from operating activities
Net profit
25,440
Adjustments on net profit to get
net cash flows from operating
activities:
-Increase in
350
inventories
-Increase in
1,490
debtors
-Decrease in
230
(2,070)
creditors
Example 1: Answer
Net cash flow from operating
activities
Cash flow from investing
activities
-Purchase
premises
Net Cash flow before financing
activities
Cash flow from financing
activities
-Drawings
Net increase (decrease) in cash
Cash balance at the beginning of
23,370
(3,800)
19,570
(18,250)
1,320
4,300
Summary
Cash flow Increase
from
Decrease
Operating
Decrease CA
Increase CL
Increase CA
Decrease CL
Profits
Sale FA
Introduces capital
Sale of shares
Losses
Purchase FA
Drawings
Dividends paid
Investing
Financing