Accounting Business Reporting for Decision Making

CHAPTER 7 Statement of cash flows 283

expense prepayments and accruals in the balance sheet. These accounts in the balance sheet are necessary

because of accrual accounting. For example, if a sale is made on credit (i.e. no cash flow), then a record in the

accounts receivable account is made. The reconciliation picks up changes in these operating accounts from

one year to the next. By doing so, it can help users to quickly ascertain the changes in operating accounts

brought about by the use of the accrual basis versus the cash basis of accounting. Sometimes these accounts

are referred to as working capital as they represent the normal capital required to run the business. Examining

the working capital accounts shows whether the profit and flows of cash are being utilised wisely within the

entity’s normal operations.

The reconciliation usually starts with the profit or loss after tax, as per the statement of profit or loss,

and ends with the cash from operating activities. To reconcile the two amounts, it is necessary to think

about the differences between the statement of profit or loss and the cash from operating activities.

The reconciliation must be disclosed in the financial statements as a note to the accounts. The recon-

ciliation of profit to net cash flows provided by operating activities for JB Hi-Fi Ltd in 2015 was dis-

closed as note 32 in the JB Hi-Fi Ltd 2015 financial statements.

An inspection of the JB Hi-Fi Ltd reconciliation in figure 7.2 firstly presents the profit for 2015 of

$136 511 000. This figure is taken from the statement of profit or loss. Adjustments are then made to allow

for non-cash items that were contained in the profit (e.g. depreciation expense). Further adjustments need

to be made relating to current assets and liabilities (e.g. accounts receivable (debtors) and accounts payable

(creditors)). This is due to the accrual recording system explained previously. For example, an inspection

of the 2015 JB Hi-Fi Ltd balance sheet (see chapter 5) and the reconciliation in figure 7.2 show that the

company had an increase in inventory for the year. Assuming that there were no price increases, this means

that it bought more inventory than it sold. Its accounts receivable balance increased, which means that

there were more sales made on credit in the period relative to the cash received from accounts receiv-

able, thus decreasing cash received from sales. The increase in ‘other assets’ and deferred tax means that

JB Hi-Fi Ltd has increased these assets (i.e. prepayments), thus saving cash.

The 2015 reconciliation also shows that JB Hi-Fi Ltd had an increase in accounts payable. Therefore,

cash paid to suppliers for the period is lower than the purchases appearing in the statement of profit or

loss. The provisions also increased. This means that JB Hi-Fi Ltd has paid out less in provision-related

expenses than expenses incurred for the period.

Changes in current assets and liabilities are expected as balances fluctuate throughout the year. These

changes should be considered in light of other information in the report. For example, examining the

reconciliation of JB Hi-Fi Ltd shows an increase in inventories. This would be expected given the

increase in the number of stores and in online sales.

A summary of the reconciliation of profit to net cash flows from operating activities is shown in figure 7.3.

Adjustments in non-cash

items from the statement

of prot or loss

depreciation/amortisation/loss on sale of asset

gain on sale of asset

loss on sale of asset

+

−

+

=

Adjustments from

changes in balances

of current assets and

liabilities from

the balance sheet

+

+

−

−

decrease in current assets

increase in current liabilities

increase in current assets

decrease in current liabilities

Net cash ow from operating activities

Operating prot after tax

FIGURE 7.3 Summary of reconciliation adjustments