Attachment V2: Cash Flow Statement and Analysis
Part 1: Why EPL's Approach to Cash Flows Is Incorrect
EPL has been preparing cash flows by only considering cash at the bank and future spending
projections. However, this approach does not provide a comprehensive view of cash movement
within the business.
• What is the applicable IFRS standard?
o The applicable standard is IFRS 7 - Statement of Cash Flows, which prescribes
the presentation of cash flows and outlines how companies should disclose
information on their cash movements.
• What is the objective of a cash flow statement?
o The objective of the cash flow statement is to provide information about the
cash inflows and outflows of a business over a period. It helps users assess the
entity's ability to generate cash and cash equivalents and its needs for cash.
• Why is cash flow analysis important in a business?
o Cash flow analysis is crucial as it shows how well a company generates cash to
cover its operating expenses, debts, and investments. Unlike profit, which can
include non-cash items, cash flow reflects the actual liquidity available to the
business.
• What are the limitations of cash flow analysis?
o Lack of Future Prediction: Cash flow statements focus on past performance,
offering limited predictive power.
o Exclusion of Non-Cash Transactions: Non-cash activities (such as
depreciation) do not appear in cash flow statements, which might present an
incomplete financial picture.
o Short-Term Focus: Cash flow statements reflect a specific period, making it
difficult to capture the long-term financial health of a business.
Part 2: Components of a Cash Flow Statement
The main components of a cash flow statement are:
1. Operating Activities:
o These are the main revenue-producing activities of the business. They include
cash receipts from sales of goods/services and payments to suppliers and
employees.
o Example: Cash receipts from customers, payments for inventory.
2. Investing Activities:
o Activities related to the acquisition and disposal of long-term assets and other
investments.
o Example: Purchase of property, sale of equipment.
3. Financing Activities:
o These include transactions with the company’s owners and creditors, such as
issuing shares, taking loans, and repayment of loans.
o Example: Repayment of long-term borrowings, proceeds from issuing shares.
Direct Method Cash Flow Template
Cash Flow from Operating Activities Note R
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Interest received
Dividends received
Interest paid
Income tax paid
Dividends paid
Net Cash Inflow from Operating
Activities
Statement of Cash Flows for Bushbuckridge Limited (‘Bush’)
1. Operating Activities (Cash Flow from Operating Activities)
• Cash Receipts from Customers: Use revenue data from the statement of profit or
loss.
o Revenue: R2,268,750
• Cash Paid to Suppliers and Employees: Use cost of sales and other operating
expenses from the statement of profit or loss.
o Cost of Sales: R1,017,500
o Operating Expenses: R696,250
o Total Cash Paid: R1,713,750
The difference between revenue and cash paid is Cash Generated from Operations:
o Cash Generated from Operations: R2,268,750 - R1,713,750 = R555,000
• Interest Received: R6,250
• Dividends Received: R2,400
• Interest Paid: (R15,000)
• Income Tax Paid: (R262,500)
Net Cash Inflow from Operating Activities:
• Total = R555,000 + R6,250 + R2,400 - R15,000 - R262,500 = R286,150
2. Investing Activities
This section includes the following:
• Purchase of Furniture: Furniture was sold for R50,000 and new furniture was
purchased (R50,000).
• Proceeds from Sale of Financial Assets: R50,000
• Proceeds from Sale of Furniture: R8,750
• Cash Paid for Purchase of Vehicles: R93,750 (trade-in and payment by cheque).
Net Cash Used in Investing Activities:
• Proceeds from sale of financial assets: R50,000
• Proceeds from sale of furniture: R8,750
• Cash paid for vehicles and furniture: (R93,750)
• Total = R58,750 - R93,750 = (R35,000)
3. Financing Activities
Includes:
• Dividends Paid: (R20,000)
• Repayment of Long-term Borrowings: (R12,500)
Net Cash Used in Financing Activities:
• Total = (R20,000) + (R12,500) = (R32,500)
4. Net Increase/(Decrease) in Cash and Cash Equivalents
Combine the net cash flows from operating, investing, and financing activities.
• Net Cash Flow from Operating Activities: R286,150
• Net Cash Used in Investing Activities: (R35,000)
• Net Cash Used in Financing Activities: (R32,500)
• Net Increase/(Decrease): R286,150 - R35,000 - R32,500 = R218,650
5. Cash and Cash Equivalents at the Beginning of the Year
Use the opening balance from the Bank in the statement of financial position.
• Opening Balance: R67,500
6. Cash and Cash Equivalents at the End of the Year
Add the net increase/(decrease) to the opening balance to get the closing balance.
• Closing Balance = R67,500 + R218,650 = R286,150
Bush LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE
20.24
Cash Flow from Operating Activities R
Cash Receipts from Customers 2,268,750
Cash Paid to Suppliers and Employees (1,713,750)
Cash Generated from Operations 555,000
Interest Received 6,250
Dividends Received 2,400
Interest Paid (15,000)
Income Tax Paid (262,500)
Net Cash Inflow from Operating Activities 286,150
Cash Flow from Investing Activities R
Proceeds from Sale of Financial Assets 50,000
Proceeds from Sale of Furniture 8,750
Cash Paid for Purchase of Vehicles and Furniture (93,750)
Net Cash Used in Investing Activities (35,000)
Cash Flow from Financing Activities R
Dividends Paid (20,000)
Repayment of Long-term Borrowings (12,500)
Net Cash Used in Financing Activities (32,500)
