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    1.+FRA - Study+Guide - v2.0 8

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    Jerlin Preethi

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    1.+FRA - Study+Guide - v2.0 8

    Uploaded by

    Jerlin Preethi
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    1.+FRA_Study+Guide_v2.0 8

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    3 views5 pages

    1.+FRA - Study+Guide - v2.0 8

    Uploaded by

    Jerlin Preethi

    Copyright:

    © All Rights Reserved
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    FINANCIAL REPORTING ANALYSIS

    P Group

    CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS At…..


    $ $
    ASSETS

    Non-Current Assets
    Property, plant and equipment (P + S) X
    Goodwill (W3) X
    X
    Current Assets
    Inventories (P + S – unrealised profit) X
    Trade receivables (P+ S – interco balances/dividends) X
    Cash and cash equivalents (P + S) X X
    Total assets X

    EQUITY AND LIABILITIES


    Capital And Reserves
    Ordinary share capital (P only) X
    Group Reserves (W5) X
    Non-controlling interest (W4) X X

    Non-Current Liabilities
    Long-term borrowings (P + S) X

    Current Liabilities
    Trade and other payables (P + S – interco balances) X
    Current tax payables (P + S) X
    Dividend payable (P + S – interco dividends) X X
    Total equity and liabilities X

    KHE-LCD-SGD-00446 60
    FINANCIAL REPORTING ANALYSIS

    Topic 9 SFRS(I)1-7 Statement of Cash Flows


    Learning Objectives

    Prepare an organisation’s Statement of Cash Flows

    After studying this topic you will be able to:

    1. Explain the purpose of Statement of Cash Flows


    2. Describe the advantages and limitations of Statement of Cash Flows
    3. Understand the components of cash flow
    4. Prepare a Statement of Cash Flows

    Purpose of Statement of Cash Flows

    The purpose of a statement of cash flows is to show the effect of a company’s


    transactions on its cash balance. It has often been thought that the statement of
    cash flows is more easily understood than the statement of profit or loss and other
    comprehensive income and the statement of financial position.

    The statement of profit or loss and other comprehensive income and the statement
    of financial position are prepared on an accruals basis. They provide information
    about profitability and financial position, but do not show how the company has
    generated and used cash.

    The statement of profit or loss and other comprehensive income and the statement
    of financial position may show profits on an accruals basis even if the company is
    suffering severe cash flow problems. This presents a misleading picture, because
    a business will not continue in existence if it cannot generate cash to meet its
    liabilities as they fall due.

    The statement of cash flow is less susceptible to manipulation because cash


    receipts and payments can be determined objectively, whereas using accounting
    policies the statement of profit or loss and other comprehensive income and the
    statement of financial position can be adjusted to show the results required.

    The statement of cash flow can highlight trading cash flows and major cash inflows
    and outflows during the year. It can then be used to aid decision making, for
    example on future non-current asset purchases and how to finance them.

    The thing to remember is that profit does not equal cash.

    KHE-LCD-SGD-00446 61
    FINANCIAL REPORTING ANALYSIS

    DEFINITIONS

    CASH CASH CASH OPERATING ACTIVITIES FINANCING


    EQUIVALENTS FLOWS ACTIVITIES INVESTING ACTIVITIES

    Cash on short term, Inflows and Principle The Activities


    hand highly liquid outflows revenue acquisition that result in
    and investments of cash and producing and changes in
    demand that are readily cash activities of disposal of
    the size and
    deposits convertible to equivalents. the long-term
    known amounts enterprise, assets composition
    of cash and and other and other of the equity
    which are activities that investments capital and
    subject to an are not not borrowings
    insignificant investing or included in of the
    risk of changes financing cash enterprise.
    in value. activities. equivalents'

    Managing Cash Flows

    If the company is facing cash flow problems, the following may be considered:

    1. Negotiate for a longer credit term with suppliers

    2. Encourage trade receivables to pay earlier by giving early settlement discounts

    3. Arrange / increase overdraft facility

    4. Issue new shares / rights issue

    5. Take up long term loans / Issue debentures

    If the company is having excessive cash, the following may be considered:

    1. Pay its trade payables earlier to obtain early settlement discounts

    2. Replace / upgrade non-current assets to increase future efficiency

    3. Invest in other profitable investments to earn returns

    KHE-LCD-SGD-00446 62
    FINANCIAL REPORTING ANALYSIS

    Advantages of Cash flows

    1. The statement of cash flows is intended to give indicators of liquidity and viability.
    Cash generation (not profits) is important to the survival of a company. A company can
    be profitable but if it is not able to manage its cash flows, it can become insolvent.

    2. It gives an indication of financial adaptability (i.e. ability to generate cash by selling


    assets or raising additional capital).

    3. Cash flow accounting directs the user to the cash flows within the business and the
    implications of management decisions.

    4. The Statement of cash flows provides clearer information than profit statements as
    they cannot be distorted (manipulated) by accounting conventions and concepts.

    5. The accruals concept can be confusing to the layman; cash flows are more easily
    understood.

    6. Cash flow reporting enables easier comparison of results between different companies.

    7. The information needs of creditors and employees are better served by cash flow
    accounting, i.e. they show the ability of the company to pay

    Limitation of Cash flows

    1. Based on historic information.

    2. Require careful interpretation. Cash flows although less susceptible to


    manipulation compared to profits may still be manipulated at year-end in the
    following ways:

    - Give good early settlement discounts to encourage early settlement of debts


    by receivables

    - Factoring receivables to outside factoring companies

    - Reducing selling prices to increase sales on cash basis

    - Offering short-term incentives e.g : better discounts to increase sales on


    cash basis

    - Delaying payments to creditors till the beginning of the following year

    - Delaying the spending of expenses till the beginning of the following year

    - Disposing non-current assets

    KHE-LCD-SGD-00446 63
    FINANCIAL REPORTING ANALYSIS

    Components of Statement of Cash Flows

    SFRS(I)1-7 Statement of Cash Flows requires a statement of cash flows to be


    presented using standard headings that highlight the major components of cash flow.

    Operating Activities

    The amounts of cash flows arising from operating activities is a key indicator of the extent
    to which the operations of the enterprise have generated sufficient cash flows to repay
    loans, maintain the operating capability of the enterprise, pay dividends and make new
    investments without recourse to external sources of financing.

    Information about the specific components of historical operating cash flows is useful, in
    conjunction with other information, in forecasting future operating cash flows.

    Cash flows from operating activities are primarily derived from the principal revenue-
    producing activities of the enterprise.

    Some transactions, such as the sale of an item of plant, may give rise to a gain or loss
    which is included in the determination of profit or loss. However, the cash flows relating
    to such transactions are cash flows from investing activities.

    The main cash inflows are:


    (i) Cash receipts from sale of goods and rending of services
    (ii) Cash receipts from royalties, fees, commissions and other revenues
    (iii) Cash receipts from insurance claims and settlements and tax refund

    The main cash outflows are:


    (i) Cash payments to suppliers for goods and services
    (ii) Wages and salaries
    (iii) Taxes
    (iv) Interest paid to lenders and creditors and dividends paid to shareholders

     Cash payments or refunds of income taxes comes under operating activities


    unless they can be specifically identified with financing and investing activities.

     SFRS(I)1-7 allows interest paid and dividends paid to be an operating cash flow
    or a financing cash flow. Interest received can be an operating cash flow or an
    investing cash flow.

    The three standard headings:

    (I) Cash flow from operating activities

    KHE-LCD-SGD-00446 64

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