Accounting Business Reporting for Decision Making

292 Accounting: Business Reporting for Decision Making

•   The operating, investing and financing activities are linked to components in the statement of profit

or loss and the balance sheet. A summary of the common links is shown in table 7.2.

TA B LE  7. 2 Activity classification in the statement of cash flows

Cash inflows Cash outflows

Link to other

statements

Operating activities •  Receipts from customers

•   Interest received

•   Dividends received

•   Payments to suppliers

and employees

•   Interest paid

•   Taxes paid

•   Revenue and expense

items in the statement

of profit or loss and

current assets and

current liabilities in the

balance sheet

Investing activities •  Sale of property, plant

and equipment

•   Receipt of loan payments

•   Sale of other businesses

•   Purchase of property,

plant and equipment

•   Making loan repayments

•   Purchase of other

businesses

•   Non-current assets in

the balance sheet

Financing activities •  Borrowing cash

•   Proceeds from issuing

shares

•   Repaying borrowed cash

•   Payments to acquire or

redeem the entity’s shares

•   Payment of dividends

•   Non-current liabilities

and equity in the

balance sheet

DECISION-MAKING EXAMPLE

Using cash flows to evaluate loan applications

SITUATION You are a bank lending officer and are evaluating a loan application. The applicant has

been in business for three years and is seeking to expand. Examine the figures below and make a

recommendation to your manager.

Year 1 Year 2 Year 3

$’000 $’000 $’000

Profit attributable to equity holders of the parent

Net cash (used in)/provided by operating activities

Net cash (used in)/provided by investing activities

Net cash (used in)/provided by financing activities

56

70

(27)

(40)

75

100

(54)

(40)

120

130

(40)

(40)

DECISION There is a profit and a positive cash flow each year over the three years. The cash flow

from operations is greater than the profit and this is normal as there would be some non-cash items

such as depreciation included in the profit figure. Over the three-year period funds have been invested

into the business presumably to help grow the business. The funds withdrawn from the business under

financing activities points to a payment to the owners each year. The distributions back to the owners

seem reasonable given the cash flow the business is generating. Certainly, the withdrawal of funds

plus the money invested into the business is less than the total cash flow provided by the operations

each year. This would mean the business has a healthy cash balance. Based on the cash information

provided, the loan could be recommended. It seems that the business is looking at growing at a

greater rate than what can be achieved using their own generation of cash. Obviously, suitable loan

limits and covenants would need to be considered.

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