Cash Flows

Structure of a Cash Flow Statement

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Overview of Cash Flow Segments

As mentioned earlier and shown in the above image, the cash flows are classified into 3 different segments. 

These are: Operating activities, Investing activities, and Financing activities. 

  • The Cash Flows from Operating activities pertain to the Cash Inflows and Outflows from the main revenue generating activities of the business. 

  • The Cash Flows from Investing activities pertain to the Cash Inflows and Outflows when the business buys and sells Non-Current Assets, and from other investments outside of the business. 

  • The Cash Flows from Financing activities pertain to the Cash Inflows and Outflows from external borrowings (Non-current Liabilities) and equity to support the business activities.

Operating Activities

Operating activities are what a business normally does to generate a profit. For example,. a trading business like Bunnings would generate most of its revenue from selling sell hardware products to customers. Bunnings would incur operating expenses such as paying the suppliers from which they purchase inventory, paying the wages and salaries of their workers, advertising and administration costs. 

Common Cash Inflows and Outflows Under Operating Activities: 

Cash Inflows: 

  • Cash receipts from sale of goods and services 

  • Cash receipts from fees and commissions 

Cash Outflows: 

  • Cash payments to suppliers for goods and services 

  • Cash payments to employees wages/salaries 

  • Cash payments for income taxes 

  • Cash payments for other expenses (electricity, insurance, advertising, rent) 

  • Cash payments to lenders for interest

Investing Activities

Investing activities include investments in other entities or term deposits, or investments in its own business by purchasing new property, plant or equipment. The activities performed under this section is used for the purpose to generate additional income in the form of dividends, interest or profit or investing in assets for the purposes of growing profit from ordinary activities. The sale or maturity of these assets will also generate a cash inflow. 

Common Cash Inflows and Outflows Under Investing Activities: 

Cash Inflows: 

  • Cash receipts from sale of property, plant and equipment 

  • Cash receipts from sale of investments (shares and debentures in other entities) - Interest received 

  • Dividends received 

Cash Outflows: 

  • Cash payments to purchase property, plant and equipment 

  • Cash payments to purchasing shares and debentures in other entities

Financing Activities

Financing activities refer to the the business receipts and payments from debt or equity financing. 

  • Debt financing refers to repayments or receipts from debt liabilities such as bank loans or debentures. 

  • Equity financing refers to receipts from share capital issues or payments of dividends to shareholders. 

Common Cash Inflows and Outflows Under Financing Activities: 

Cash Inflows: 

  • Cash receipts from issuing shares 

  • Cash receipts from issuing debentures 

  • Cash received from borrowings 

Cash Outflows: 

  • Repayment of borrowings 

  • Payment of dividends to shareholders 

Important to Note - The Accounting standard AASB 107 does not specify whether interest paid on borrowing should be classified as Operating activities or Financing activities. Students can decide which classification they wish to use. In this example, interest paid on borrowings is recorded under Operating Activities as 'interest paid'.

Cash and Cash Equivalents

At the end of the Cash Flow Statement, the cash position is summarised by the net cash surplus/(deficit), showing the change between the Cash and Cash Equivalents at the Start of the Period and the End of the Period. If done correctly, the difference between Cash and Cash Equivalents and the Start and End of the Period should equal the net cash surplus/(deficit). 

An important area to note is the definition of Cash and Cash Equivalents. These are defined as the following: 

  1. Cash is defined as Cash on hand and Demand deposits. Cash on hand are the notes and coins kept on the business premise. Demand deposits is cash kept in the bank which the business can withdraw at any time and is not deposited for specific amount of time. 

  2. Cash Equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. These investments have a short-term maturity of 3 months or less from the date of acquisition, e.g. bank and non-bank bills, commercial bills in the short-term money market. Bank overdrafts are also considered a cash equivalent as they are repayable on demand and are an integral element in the cash management of the business operations.