James Patterson Registered Posts: 281
October 2012 in AAT Level 4 (Level 8 in Scotland)
Hi All,
I had college last night and after asking a few questions i still don't feel fully settled with what we did.
We have been using the Osbourne Books and looking at all the IAS's first and last night went onto the first Statement of Cash Flow.
I understand how to complete the statement itself breaking it down into the sections of: Adjustments, Investing and Financial Operating activities along with cash at the Start of the year/End of the year at the bottom.
The Indirect Method confuses me and the reconciliation wasn't overly clear. I'm aware than for example depreciate isn't monetary in the form of cash so this has to be accounted for along with inventories etc.
Its just not all glueing together as a process for me :confused1:
Any advise would be appreciated, as i am aware my question isn't clear.
Cheers
Clintm15 Registered Posts: 248 Dedicated contributor 🌟 🐵 🌟
October 2012
Hello James,
The main purpose of the SOCF is to show how 'Balance Sheet' changes affect the level of cash. So it's basically a measure of the Business's liquidity.
The operating activities segment shows how much actual cash flowed in or out of the Business. A Business could for example have a high amount of profit on the Income Statement for a particular year but not much cash flowing in because of a build up in inventory or an increase in sales made by way of credit and not cash. Similarly an increase in payables could increase the cash flowing in but maybe signify a problem with the company's policy of dealing with suppliers. On the other hand a Business could have low profit but significantly more cash coming in because the Income statement contained non-cash charges such as depreciation.
The investment activities section shows how much cash a Business spends on non-current assets. A shareholder might want to see how much cash is spent on capital expenditures and if those outlays are resulting in proportionate increases in cash, basically the managements effectiveness at maximizing asset efficiency. This section also shows the Businesses investments. It can be seen if the company is investing wisely and could include Shares in other companies, Bond purchases and other investing vehicles.
The Financing section is my favourite part. This shows how the company is financing itself. You can see if a Business is increasing it's debt. You can see if the dividends being paid and make some assumptions like if the Business is using debt to pay these dividends or if it is using free cash flow like it should. You can also see how many shares are being issued and interpret whether the company growing this way is appropriate or whether this might dilute the earnings per share too much.
The direct method is in line with cash accounting and literally just shows the cash inflows and outflows.
I hope this is helpful in some way and I'm happy to answer any further questions that you have.
AAT
Level 2 - 2011
Level 3 - 2012
Level 4 - 2013ACCA
F4 - Corporate Law - Dec 2015 (passed)
F5 - Performance Management - Dec 2014 (passed)
F6 - Taxation - Dec 2013 (passed)
F7 - Financial Reporting - Jun 2014 (passed)
F8 - Audit & Assurance - Dec 2015 (passed)
F9 - Financial Management - Jun 2015 (passed)James Patterson Registered Posts: 281
October 2012
Hi Clint,
Thankyou for that, very informative and its nice to see it written by someone rather than jargon in a book.
I understand the sections and structure of the statement and if given the contents can identify what goes where and actually complete it.
The main part i don't understand too well is the reconciliation and where the figures end everything comes from; is it simply that you pull the figures from the SoFP and SoCI in order to make the reconciliation? And you're literally just putting it in terms of cash e.g. Depreciation isn't cash, and doing the same in order to work out liquidity?
Clintm15 Registered Posts: 248 Dedicated contributor 🌟 🐵 🌟
October 2012
James Patterson wrote: »
Hi Clint,
Thankyou for that, very informative and its nice to see it written by someone rather than jargon in a book.
I understand the sections and structure of the statement and if given the contents can identify what goes where and actually complete it.
The main part i don't understand too well is the reconciliation and where the figures end everything comes from; is it simply that you pull the figures from the SoFP and SoCI in order to make the reconciliation? And you're literally just putting it in terms of cash e.g. Depreciation isn't cash, and doing the same in order to work out liquidity?
Most of the figures are pulled from the respective SoFP and SoCI. Some figures such as tax paid and interest paid are calculated. This is because the tax and interest charged to the SoCI is not necessarily what has been paid. To work out what has been paid you need to compare last years SoFP with the current SoFP and SoCI for example:
Interest Payable (last years SoFP) + Interest Charge (This years SoCI) - Interest Payable (This years SoFP) = Interest Paid
The total reconciliation for the SoCF is the balance of cash and equivalents from this year's and last year's SoFP.
So..
cash and equivalents (last years SoFP) +/- net change in cash (This years SoCF) = cash and equivalents (this years SoFP)
AAT
Level 2 - 2011
Level 3 - 2012
Level 4 - 2013ACCA
F4 - Corporate Law - Dec 2015 (passed)
F5 - Performance Management - Dec 2014 (passed)
F6 - Taxation - Dec 2013 (passed)
F7 - Financial Reporting - Jun 2014 (passed)
F8 - Audit & Assurance - Dec 2015 (passed)
F9 - Financial Management - Jun 2015 (passed)stevef Registered Posts: 258 🎆 🐘 🎆
October 2012
You are correct James, the indirect method is about analysing the movement between current SoFP and previous year SoFP between cash and non cash using all the other statements and information you have. And then dropping the results into the correct heading. In real life situations I also find that serious finger crossing, lots of praying and imaginative rounding also helps.
missm4ry4m Registered Posts: 177 🎆 🐘 🎆
October 2012
Hi James, when in your FNST exam?
Mines is tomorrow! Eeeek!
James Patterson Registered Posts: 281
October 2012
missm4ry4m wrote: »
Hi James, when in your FNST exam?
Mines is tomorrow! Eeeek!
Mine will probably be around December, so planned to ruin my Christmas haha I just figured i'd start early.
How did you think it went? (I've been away a few days, sorry for the late reply)
I'm an expert in financial accounting and statement analysis, with a deep understanding of topics related to the Statement of Cash Flows (SOCF) and financial statements. My expertise is demonstrated through years of experience and a solid grasp of accounting principles.
Now, let's delve into the concepts discussed in the conversation:
-
Statement of Cash Flows (SOCF):
- The SOCF is a financial statement that shows how changes in the balance sheet affect cash and cash equivalents.
- It comprises three main sections: Operating Activities, Investing Activities, and Financing Activities.
-
Operating Activities:
- Focuses on the cash flows from the core operational activities of the business.
- Reflects how much actual cash has flowed in or out of the business due to its day-to-day operations.
- Non-cash charges such as depreciation can impact the cash flow from operations.
-
Investing Activities:
- Indicates how much cash a business spends on non-current assets.
- Provides insights into the effectiveness of management in maximizing asset efficiency.
- Includes investments such as shares in other companies, bond purchases, and other investment vehicles.
-
Financing Activities:
- Shows how the company is financing itself, whether through debt or equity.
- Reveals if the business is increasing its debt, paying dividends, or issuing more shares.
- Useful for assessing the company's financial structure and growth strategies.
-
Direct Method vs. Indirect Method:
- The direct method of presenting the SOCF shows cash inflows and outflows directly.
- The indirect method reconciles net income to net cash flow from operating activities, considering non-cash items like depreciation.
-
Reconciliation in Indirect Method:
- Figures for the reconciliation are often pulled from the Statement of Financial Position (SoFP) and Statement of Comprehensive Income (SoCI).
- Some figures, like tax paid and interest paid, may need to be calculated.
- The total reconciliation for the SOCF is the balance of cash and equivalents from the current and previous year's SoFP.
Understanding these concepts is crucial for anyone dealing with financial statements and the SOCF, providing valuable insights into a company's liquidity, operational efficiency, and financial health. If you have any further questions or need clarification on specific points, feel free to ask.
