CHAPTER 7 Statement of cash flows 281chapter 6). The profit is $136 511 000. So, profit is lower than the cash flow from operating activities.
Is this normal? Yes, normally profit would be lower than cash from operating activities as the profit
includes non-cash deductions such as depreciation and amortisation.
The net cash flow from operating activities is an important measure to gauge the entity’s ability to
generate cash, to meet its obligations, to continue as a going concern and to expand. It represents the
cash flow from normal business operations. If an entity has negative cash flows from operations, it may
be struggling to meet its financing and investing obligations, or to attract new investment and finance. In
the long term, an entity cannot rely solely on finance and investing activities to maintain cash levels. Few
people would want to invest in or finance an entity that cannot generate enough funds through its normal
activities to meet interest or dividend payments.
Investing activities
Investing activities are those activities that relate to the acquisition and/or disposal of non-current assets
(including property, plant and equipment, and other productive assets), as well as investments (such as
securities) not falling within the definition of cash. This section of the statement of cash flows usually
identifies the investment decisions of the entity that are reflected in the non-current asset section of the
balance sheet. These activities are generally associated with the change in non-current assets; that is, the
cash paid for non-current assets and that received from the sale of non-current assets. Ideally, invest-
ments in the non-current assets will positively increase the cash flow in forthcoming years. Examples of
cash inflows include the sale of property, plant and equipment; the sale of shares; and the collection of
loans from other entities. Examples of cash outflows include the purchase of property, plant and equip-
ment; the purchase of shares; and the lending of money to other entities.
The items under this classification allow a user to analyse an entity’s future direction by studying
the major asset acquisitions and disposals. Remember, the entity must invest in order to generate future
income and cash flows. As an investor in an entity, you would probably prefer that the entity invest in
assets that will at least maintain current operations. If the entity has a desire to grow, you would expect
that the net cash flow from investing activity would be negative.
The investing activities shown in the 2015 JB Hi-Fi Ltd statement of cash flows are presented in
figure 7.2. In 2015, the total cash outflow for investment was $44 370 000. The 2014 comparative figure
shows that the total cash outflow for investment was $38 240 000. Therefore, there was a slight increase
in investment activity across the two periods. The negative cash outflow for investment activities is a
good indicator that JB Hi-Fi Ltd is at least maintaining current operations. It is difficult to gauge the
split in investment spend between maintaining existing operations and new investment. Generally, a read
through the annual report will help to ascertain any growth plans. JB Hi-Fi Ltd reports an increase to
187 stores, following the opening of five new stores in 2015, so modest growth is being pursued.
As a user of the financial statements you must make a personal decision as to whether this is good or
bad. On the one hand, growth in the number of stores should lead to growth in sales and consequently
more profit and more cash from operations. If you are an investor, this would increase the value of your
investment and/or lead to greater dividends. On the other hand, growing more stores means a greater
future maintenance bill. This could be a drain on the company cash and siphon off money that could go
towards paying down debt and increasing dividends. It is a personal opinion that each investor would
reach based on their view of the world economic environment, the retail trends of online versus bricks
and mortar shopping and a comparison of profit and cash flow in relation to the number of store open-
ings over the last few years.
Financing activities
Financing activities are those activities that change the size and/or composition of the financial structure
of the entity (including equity), and borrowings not falling within the definition of cash. These activities
are generally associated with changes in non-current liabilities and equity (i.e. the cash received from