Accounting Business Reporting for Decision Making

CHAPTER 7 Statement of cash flows 267

DECISION-MAKING EXAMPLE

Impact of cash flows on investment

SITUATION You are an investor who has been given an investment recommendation by your

finance broker. The main reason for the recommendation is the extra tax benefits due to the primary

production nature of the business. Being an accounting scholar, you decide to download the financial

statements from the last couple of years and discover the following:

2016 2015

$’000 $’000

Profit attributable to equity holders of the parent

Net cash (used in)/provided by operating activities

44 607

(29 775)

65 713

(44 725)

Should you act on the recommendation and invest?

DECISION The negative cash flow should signal a warning to you that the company is not bringing in

cash from its operations. So the company will need to get cash either from borrowing money or by asking

investors to put up some more money. Sustaining a cash outflow can’t be done in the long term.

Difference between cash and accrual accounting

Recall from chapter 6 that reporting entities must calculate their profit or loss using an accrual system of

accounting. However, the accrual system focuses on when a transaction takes place (i.e. the sale) and not

when the payment for that transaction occurs. In contrast, the statement of cash flows is concerned with

cash receipts and payments, and not the timing of the underlying transaction.

This difference is highlighted in illustrative example 7.1. The statement of profit or loss of Mum’s

Choc Heaven Pty Ltd reports a profit of $7900, while the statement of cash flows reports that the net

cash provided by operating activities for the reporting period is ($6000). Why the difference?

For entities using accrual accounting, such as an entity providing chocolate products, the timing of cash receipts
and payments will differ from when the transaction takes place.