Accounting Business Reporting for Decision Making

CHAPTER 7 Statement of cash flows 287

Step 1: Determine the cash flows from operating activities

Recall the cash flows from operating activities, as illustrated in figure 7.2, include:
• receipts from customers
• payments to suppliers and employees
• dividends received
• interest and bill discounts received
• interest and other costs of finance paid
• income taxes paid.
Using the listed cash flows as a guide, work through each in turn using the information from the other
financial statements. Receipts from customers and payments to suppliers and employees must be cal-
culated. The other components can be read directly from the financial statements.

Step 1a: Calculate the receipts from customers

The receipts from customers are related to the sales in the statement of profit or loss and the
accounts receivable in the balance sheet. The opening balance of the accounts receivable repre-
sents what was owed by customers at the beginning of the year and the closing balance represents
what was owed by customers at the end of the year. The sales state the customer activity for the
current year. In our example:

Opening balance accounts receivable

+ Sales for the current year

$ 23 110

1 550 000

= Total amount that could be received from customers

− Closing balance accounts receivable

1 573 110

(93 010)

= Cash received from customers $1 480 100

Cash from customers = Opening accounts receivable + Sales

− Closing accounts receivable

Step 1b: Calculate payments to suppliers and employees

Payments to suppliers can take two forms: payments to inventory suppliers and payments to other sup-
pliers (e.g. for electricity, telephone, rent). Payments to employees are for wages. Accounts that relate to
suppliers and employees include:
• inventory purchases from the statement of profit or loss and accounts payable from the balance sheet
• operating expenses from the statement of profit or loss and prepaid expenses and accrued expenses
from the balance sheet.
Let’s deal with each of these in turn.
The same logic used for step 1a can be applied to payments to suppliers. Firstly, payments to sup-
pliers for inventory are related to the beginning and closing balances of accounts payable in the balance
sheet and the inventory purchases in the statement of profit or loss. In our example:

Opening balance accounts payable

+ Inventory purchases

$ 3 300

650 000

= Total amount that could be paid

− Closing balance accounts payable

653 300

(42 500)

= Cash paid to inventory suppliers $ 610 800

Cash paid to suppliers = Opening accounts payable + Purchases

− Closing accounts payable

Other payments to suppliers are related to other expenses in the statement of profit or loss and accrued
and prepaid expenses in the balance sheet. Accrued expenses are those expenses that are due to be paid
but have not been paid yet (such as rates owing). Prepaid expenses are those expenses that have