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Hi.
[INAUDIBLE] here.
And in this video, we'll be exploring the statement
of cash flows under IFRS.
The statement of cash flows is the last statement
before the notes to the financial statements.
Remember, this is for public corporations who must use IFRS
and private corporations who choose to use IFRS.
In our last video on the statement
of financial position, I demonstrated
the interconnection between the various statements using
slides.
Understanding the interconnection
between the statements is critical
when developing the statements.
Today, to show you a different view,
I'm going to use a matrix.
Now you'll see in the far left column, the statement name
and the amount that is carried to another statement.
If you follow the row to your right,
you see which statement this amount is carried to.
Let's focus on just one row, so that you can see an example.
Here, you can see that the profit or loss
amount from the income statement is
used as an opening number in the statement
of comprehensive income.
It is also added or deducted from the opening retained
earnings on the statement of changes in equity.
Finally, it's used as an opening number
for operating activities in the statement of cash
flows indirect method.
You can also see, very quickly, that the profit or loss
amount is never used directly in the statement
of financial position.
As you can see, this matrix quickly
shows you the interconnection between the different financial
statements.
Let's go back to the full matrix and focus on the last row.
It shows that cash from the current asset
section of the statement of financial position
is used as the closing cash on the statement of cash flows.
If you look at the last column in the matrix,
you see the two statements which are
interconnected to the statement of cash flows,
the profit or loss from the income statement,
and the closing cash balance from the statement
of financial position.
Although you don't have to use a matrix
to understand the interconnection
between the various financial statement,
it is one way to understand this concept.
The statement of cash flows can be
prepared using the direct or indirect method.
Let's quickly look at the differences before we move on.
The direct method lists the inflows and outflows
from each type of operating activity a company performs.
Cash flow categories can include cash collected from customers,
cash paid to suppliers, and cash paid to employees,
just to list a few.
This method is preferred by IFRS because it
is more informative for users, clearly showing the sources
and uses of cash in operations.
The indirect method focuses on the differences
between net income under accrual accounting and cash
from operations under cash accounting.
It starts with net income and adjusts for non-cash items.
The direct method is more difficult for users
to understand, but it does not stop approximately 98%
of all US, European, and Canadian companies
from using the indirect method to calculate cash flows
from operating activities.
Why is that?
Because it's easier and less costly to prepare.
One benefit for users of the indirect method
is that it highlights earnings management.
We'll further explore this concept
when we cover the development of the cash flow
statements in a later video.
As you can imagine, we'll be using the statement of cash
flows indirect method for purposes of all of our videos.
The statement of cash flows is divided
into three activities, operating, investing,
and financing.
Description of these activities have already
been covered in a previous video,
but let's just review them.
Financing is activities that fund a company either
through debt or equity.
Investing is activities that result from buying or selling
property, plant, equipment, intangibles, or investments
in other corporations.
Operating activities is when a company does their business
day-to-day, selling and delivering goods or services.
To obtain an in-depth understanding
of these activities, please see my video
on business activities.
Let's do a quick check of your understanding so far.
The payment of interest on a long term loan
is considered either an operating or financing
activity.
IFRS allows prepares to choose where
to place interest payments.
The reason why will be explored in future videos
on developing a statement of cash flows.
Now that we understand the activities
that make up the statement, we can look at an example.
Note that the statement is so large that I've divided it
into two slides so that you can see each activity better.
But the statement is actually one statement.
Although I have set up the statement in columns
for easy viewing, the accounts can all
be listed in one column and the amounts in another.
As always, the statement starts with a heading,
which must include the company name,
the title of the financial statement,
and the period of time covered.
Note, similar to every financial statement except the statement
of financial position, this statement
is for a period of time, most commonly, one year.
Note that profit from the income statement
is the beginning point under the indirect method.
All the other amounts are reconciling
items between profit from the income statement and cash
flow from operating activities.
This includes things such as depreciation
and the change in current asset and liability accounts
from the statement of financial position.
At the bottom of this section, we
see that operating activities resulted in a net cash
inflow of $21,400.
Investing activities are next.
You'll note, there is a net cash outflow of $7,500.
This is due to the purchase of both equipment and investments.
Finally, let's look at financing activities.
Some of the items under financing activities
have a connection to the statement of changes in equity.
Here, we see that the company issued shares as well as
repurchased some.
They also paid dividends.
Let's quickly flip back to the statement of changes in equity
so we can see the relationship.
Both the statement of cash flows and the statement
of changes in equity show a dividend payment of $2,500.
That's because this amount was paid in cash.
In addition, both statements show
an issue of shares of $11,600.
Again, that's because this amount was received in cash.
Note that the repurchase of shares on the statement
of changes in equity is $5,000.
But the outflow on the statement of cash flows was $7,500.
That's because the $5,000 is historical cost,
and the $7,500 on the statement of cash flows was cash.
Further discussions of why these two amounts are different
will be covered in a future video.
Looking at the total from the financing activities,
we can see there was a net outflow of $1,700.
The bottom of the cash flow statement
shows a net change in cash.
This is a summation of all three activities,
operating inflow of $21,400, investing
and financing outflows of $7,500, respectively.
The net increase in cash was therefore $12,200.
Add this to the beginning cash balance of $72,300
and we get the ending cash balance of $84,500.
This amount is a cash balance on the statement
of financial position under current assets.
Again, this is the interconnection
between the statement of financial position
and the statement of cash flows.
Let's take a quick look at the statement of cash flow again.
Remember we start with the appropriate heading and profit
from the income statement.
We move on to the operating activities and then
the investing activities, with the financing activities
listed last.
The net change in cash is then added--
this is when a net inflow is demonstrated, as it is here--
or deducted, if there is a net outflow from the opening cash
balance to obtain the closing cash balance from the statement
of financial position.
Let's check your understanding for a second.
Remember to pause the video to determine your own answer
before continuing.
The president of Greene Corp. announces the company
is expanding into new markets.
You examine the statement of cash flows
and see a net cash outflow from operating activities and inflow
from both investing and financing activities.
Does the statement of cash flows support
the president's announcement?
No.
No, it does not.
A net outflow from operating activities
means cash outflows are greater than inflows.
Since operating activities are the only sustainable source
of cash, this does not support expansion plans.
In addition, an inflow from investing activities
means the company is selling assets,
not buying assets necessary to expand into new markets.
So what questions does the statement of cash flow answer.
For investors, it helps them determine,
in conjunction with the income statement,
if there will be enough cash in the future to pay dividends.
For lenders and other creditors, it
helps them determine if there is cash available to pay debts
as they come due.
It also helps them determine if the company will
need further financing in the future.
Finally, all external users can use the cash flow statement
with the income statement to help predict future cash flows.
We have now completed all the financial statements
under IFRS.
But there is an important addition
to the statements, which we have not
covered, the notes that accompany
the financial statements.
And that will be the topic of our next video.
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