Accounting Business Reporting for Decision Making

278 Accounting: Business Reporting for Decision Making

Teresa’s Carpets and Rugs

Statement of cash flows for the period April–May 2016

Cash from financing activities

Proceeds from capital contribution

Proceeds from borrowings

Repayment of borrowings

Distributions paid

20 000

50 000

—

—

Net cash from financing activities 70 000

Net increase/decrease in cash for the year

Cash at the beginning of the period

117 500

—

Cash at the end of the period $ 117 500

(continued)

Compare the presentation format of the statement of cash flows in illustrative example 7.16 with the

format we used earlier. The cash flows are now separated into cash flows relating to operating, investing

and financing activities. Operating activities relate to the normal activities of the entity. For Teresa’s

Carpets and Rugs this relates to the sales of merchandise, the payment for supplies, and normal running

expenses such as interest payments, lease costs and marketing expenses. Investing activities relate to the

investments in non-current assets that will help generate positive cash flows in the future. For Teresa,

this is the shop fittings and the rights to lease the shop for five years. Financing activities relate to how

the entity is to structure itself in relation to debt and equity. Teresa financed the business by injecting

$20 000 of her own money into the business and borrowing $50 000. The statement of cash flows shows

that the business is generating good cash from operations and so will probably need little debt finance in

the future. However, if Teresa were to expand the business, the good cash flow from operations could be

used to expand or to pay for higher interest costs if Teresa did decide to borrow more funds.

Throughout the case study, you should note the relationship between items in the statement of cash flows and

the statement of profit or loss and the balance sheet. The items in the cash flows from operating activities sec-

tion can be compared to the income and expense items in the statement of profit or loss and in turn to the current

assets and liabilities in the balance sheet. For example, the cash at the end of the period should correspond to

the cash appearing in the balance sheet. The items in the cash flows from investing activities can be compared to

the non-current assets in the balance sheet, and the items in the cash flows from financing activities can be com-

pared to the non-current liabilities and equity in the balance sheet. This is summarised in table 7.1.

TA B LE  7.1

Relationship between items in the statement of cash flows and the statement of

profit or loss and the balance sheet

Cash from operating activities Revenue and expenses in the statement of profit or loss

Current assets and liabilities in the balance sheet

Cash from investing activities Non-current assets in the balance sheet

Cash from financing activities Non-current liabilities and equity in the balance sheet

VALUE TO BUSINESS

•   The management of cash flow is critical for business success.

•   The statement of cash flows presents all the cash inflows and outflows of an entity over a period of time.

•   The statement of cash flows is prepared on a cash basis, whereas the statement of profit or loss

and the balance sheet are prepared on an accrual basis.

•   The purpose of the statement of cash flows is to provide users with information about the

movements of cash flows, and the increase or decrease in cash over a period, to help ascertain an

entity’s ability to generate funds and meet financial commitments.

•   The statement of cash flows is one of the financial statements included in the general purpose

financial statements of an entity.