lecture_14-cashflow_statement

lecture_14-cashflow_statement - MA826 Finance &...

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MA826 14- Cashflow statement, changes in equity, reserves & depreciation
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The Cash flow Statement The cash flow statement is not a requirement of the Companies act 1985, but is required by various accounting conventions (FRS1 and IAS7). This means that all UK quoted companies will publish one. The Income Statement and balance sheet do not fully reflect the movement in company cash balances. This is largely due to the accrual (and realisation) concepts. Eg the purchase of a new machine will involve a substantial cash outflow at the time of purchase, but the income statement will show only a fraction of that figure based on an annual depreciation allowance.
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Cash flow statements show the changes in the company’s holdings of cash over the accounting year. Ie they ignore the accruals concept. Too little cash insolvency Too much cash inefficiency The intention is to demonstrate adequate Liquidity
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The profit figure in the Income Statement may be distorted: if adjustments in the balance sheet are not correspondingly entered in the profit and loss account subjective provision for - bad debt - depreciation - value of stocks - interpretation of the accruals concept
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We construct a cash flow statement by taking the operating profit from the Income Statement and making adjustments in two stages: 1. Adjust operating profit for any cash charges (eg changes in amounts due from debtors and to creditors), which do not alter the income statement figures but do affect the cash flow. 2. Adjust cash from operations by non-trading items such as interest and tax, investment expenditure and money raised, to arrive at the net holding of cash.
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Example To construct a cash flow statement from operating profit: £000 Operating profit (income statement) 12044 +Depreciation charges 1798 -Increase in inventories
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lecture_14-cashflow_statement - MA826 Finance &...

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