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Introduction to Cash Flows

Accounting (Year 12) - Cash Flows

Christian Bien

Statement of Cash Flows

A 'Statement of Cash Flows', or simply a 'Cash Flow Statement' is a report displaying the change in the cash position of a business over a specific period of time. The report contains all the cash inflows and cash outflows during this period.

The Cash Flow Statement follows the Cash Accounting Method, recording revenues when it's received, and expenses when it's paid for. This is important to highlight as in the typical Accrual Accounting Method, revenues and expenses are recorded when it is incurred rather than when cash is received or paid.

For example, think of a shop such as JB HI FI. If a customer makes a large purchase for a TV costing $1,000, it is unlikely that he/she will pay in cash. If the customer uses a credit card, the transaction is made on the spot and the sale of $1,000 recorded as income. However, as this is paid on credit, it can take a few days or a week for the store to receive the money. Hence, the $1,000 may be recorded in the cash flow statement at a later date.

Example of a Statement of Cash Flows

The following Cash Flow Statement is an extract from the Woolworths Group 2019 Annual Report. The report shows Cash Inflows as positive figures and Cash Outflows as negative figures inside brackets. As you can see, the cash flows are divided into three segments:

  • Operating activities

  • Investing activities

  • Financing activities.

These segments will be discussed in detail on the next page. Image Above Sourced from Woolworths Group 2019 Annual Report.

Purpose of the Cash Flow Statement

The Cash Flow Statement is very useful in assessing the liquidity and solvency of a business. Users of this statement can see the ability of the business to generate cash flows, the amount of cash and the timing of when cash is received or paid. This information enables the assessment of the business to see if they are able to meet their financial obligations as and when they fall due.

The Cash Flow Statement is unique in the sense that it only shows the cash flows of the business using the Cash Accounting Method , unlike other reports which show financial position and performance using the Accrual Method.

Therefore, the Cash Flow Statement is used to asses the following in a business:

  • Financial structure: To determine where cash is received and which areas of the business cash is paid.

  • Liquidity and solvency: Ability for the business to generate cash to pay debts as they fall due.

  • Evaluation of past performance and predict future cash flows

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