282 Accounting: Business Reporting for Decision Making
the issue of shares or debt, less the cash paid to shareholders or to repay debt). Again, these cash flows
can be traced back to the balance sheet. Examples of cash inflows from financing activities include cash
received from the issue of the entity’s own shares, and cash from borrowings. Examples of cash outflows
from financing activities include dividends paid to shareholders, the repurchase of shares from share-
holders, and the repayment of borrowings.
The financing activities shown in the 2015 JB Hi-Fi Ltd statement of cash flows are presented in
figure 7.2. The statement shows a negative net cash flow from financing activities in 2015. The major out-
flows are the payment of dividends of $87 174 000 and the repayment of borrowings of $40 113 000. The
largest inflow is the proceeds from the issue of equity securities of $3 125 000. However, this amount is
minor when compared to the payment of debt and dividends. In 2014, the company reduced borrowings by
$54 063 000. Therefore, there has been a minor change in the debt and equity structure of the business. The
reduction of debt has been a common theme across many businesses during the 2012–2015 period. This
is in response to the world economic environment; in particular, the slowing of major economies, the aus-
terity measures of governments and the uncertainty of the wholesale debt market. It seems wise and pru-
dent management that JB Hi-Fi Ltd lowered its debt levels during this time. The dividend payout in 2015 is
higher than it was in 2014.This is in line with the increase in profit and cash from operations.
JB Hi-Fi Ltd’s outflow of funds for financing activities is not typical. It is typical for an entity to have
a positive inflow of cash from financing activities as generally entities borrow cash to fund expansion.
This can be viewed as a healthy step to growth. However, if over a long period of time borrowings are
significant and the cash from operating activities is struggling to pay the interest costs, then this would
indicate a solvency problem. As mentioned previously, the current economic environment is not the best
condition to borrow heavily for quick expansion. It is forcing many companies to delay investment and
to refocus on their debt to equity structures. JB Hi-Fi Ltd borrowed heavily in 2011 for the purpose of
a share buy-back and is now using its surplus cash from operations to reduce this debt. Why do enti-
ties buy back shares? Generally, entities buy back shares if they have surplus funds and there are no
immediate worthwhile investments that could earn the required rate of return. Having excess cash sitting
on the balance sheet earning minimal interest from a financial institution decreases the overall return on
equity for the entity. Large companies such as Woolworths and BHP have also strategically bought back
shares. Return on equity will be discussed fully in the next chapter.
So, with the information presented in the JB Hi-Fi Ltd statement of cash flows and the equity and lia-
bility section of the balance sheet, we can ascertain that the financial structure of the entity changed from
66 per cent debt and 34 per cent equity in 2014 to 62 per cent debt and 38 per cent equity in 2015, thus
slightly decreasing the balance sheet risk.
Reconciliation of cash from operating activities with
operating profit
In the section above, we outlined that the cash from operating activities contained all the cash flows relating
to the operations for the entity. This can be compared to the statement of profit or loss as the transactions
affecting the statement of profit or loss reflect the cash flows relating to the operations of the entity. Why
aren’t these two figures the same? Recall in chapter 6 that the statement of profit or loss is prepared based
on accrual accounting, while the statement of cash flows is prepared on a cash basis. Comparing the cash
flow from operating activities to the profit or loss in the statement of profit or loss produces a reconciliation
of these two figures showing the differences in accrual transactions and cash flow. For example, depreci-
ation is an expense, but not a cash flow, and a sale could be for cash or credit. The reconciliation of cash
from operating activities with the profit from the statement of profit or loss is presented to reinforce the
link between the cash received from operating activities and the profit or loss reported in the statement of
profit or loss. As discussed in chapters 5 and 6, operating accounts in the balance sheet are related to the
revenues and expenses in the statement of profit or loss. Sales, cost of sales and expenses in the statement
of profit or loss are directly linked to accounts such as accounts payable, accounts receivable, inventory,