Topic 7 - Cashflow Statements (1): Direct Method

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This article is a topic within the subject Accounting 1B.

Contents

Required Reading

Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning, pp. 563-581.

Cash Flow Statement

[1] It shows changes in a company’s cash balance during the period as a result of operating, investing & financing decisions. It provides information about a firm’s solvency/liquidity & its ability to grow (cash for growth capex).

  • Cash From Operating Activities – cash flows from general operating activities of the business (provision of G&S)
    • Inflows - receipts from the sale of goods, Outflows - purchasing inventories, paying taxes
  • Cash From Investing Activities – the acquisition & disposal of noncurrent assets
    • Inflows - Disposals of NCA’s, Outflows - Purchasing NCA’s
  • Cash From Financing Activities – changing size/composition of the capital structure.
    • Inflows - Proceeds from issuing shares, borrowings, Outflows - Dividends & repayments

Cash Flow Assumptions in Accounting 1B

[2]

  • All Sales are on credit
  • All Inventory purchases are on credit
  • Other expenses are linked to an accrued expenses account
  • All buying/selling of non-current assets are for cash (unless otherwise stated)

Direct Method

[3]

  • Cash Receipts From Customers
    • Accounts Receivable O/B + Credit Sales – Cash Collected = Closing Balance
  • Cash Paid to Suppliers
    • COGS + Closing Inventory – Opening Inventory = Purchases + Accounts Payable (AP) O/B – AP C/B
  • Payments to Other Suppliers of Services & Employees

Lecture Demonstration: Kurosawa Ltd

[4]

Final Statement

ACCT151171.jpg

Working - T Accounts

ACCT151172.jpg

End

This is the end of this topic. Click Accounting 1B to go back to the main subject page for Accounting 1B

References

Textbook refers to Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning

  1. Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning, pp. 563-570
  2. ASB, UNSW
  3. Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning, pp. 570-581
  4. ASB, UNSW
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