Cash Flow and Profit Loss for business student to learn basic account.ppt

This slide show what is difference between cash flow and Profit loss statement that student can learn basic of cash flow and profit loss statement

1. The Cash Flow Statement
Chap 3
The Basic Financial Statements
•Cash Flow statement
•Profit Loss Account

2. Today’s Lecture
Understand the elements of the Cash Flow Statement
Understand Profit Loss Account

3. Cash Flow
Where does it go?
Help!
?
?
In daily life, we all know the experience .. Where did the
money go? It’s good to know!
In business it’s essential to know!
Holiday ..

4. Cash Flow Statement
The Cash Flow Statement is the third of the three basic
financial statements. It is closely related to matters
concerning the daily operation of a company.
The Cash Flow Statement shows where the money goes
(out-flows) and where it comes from (in-flows) during a
certain period of time.
It also shows the net in- or out-flow during that period of
time. This is an extremely important number in the
financial management of a company!

5. Cash Flow Statement
One way to look at the difference between the three basic
financial statements.
While the Balance Sheet shows cash balances and the
Income Statement where the money comes from or goes
to, the Cash Flow Statement shows why cash increased or
deceased.

6. Cash Flow Statement
In other words: what do we have in CS?
+Beginning Cash Balance
-Cash Out-Flows (Uses)
+Cash In-Flows (Sources)
=Ending Cash Balance

7. Cash Flow Statement
The Cash Flow Statement is usually divided into three
sections:

• Cash Flows from Operations
These are the cash flows generated by the daily running of the
business. E.g. the buying and selling of goods.
• Cash Flows from Investments
Usually, with investments one means here fixed assets like
plant
and equipment.
• Cash Flows from Financing
Loans play an important part in most businesses. Here,
mainly, the
cash flows related to the repayment of loans or the taking up
of new
loans are listed.
This item could also e.g. contain the cash flows from issuing
stock.

8. A Simple Cash Flow Statement
ABCDE F G
2
3Ever Profit International
4Cash Flow Statement for the Year ended Dec 31, 1999
5
6Cash Flows from Operations
7 Receipts
8 Interest received from Investment 200
9 Payments from Customers 12000
10 Others 340
11 Disbursements
12 To suppliers -4800
13 To employees -5000
14 Others -200
15 Net Cash Flow from Op. Activites2540=Sum(G7:G14)
16Cash Flows from Investing Activities
17 Purchase of Equipment -6000
18 Sale of Equipment 1000
19 Net Cash Flow from Inv. Activities-5000=SUM(G17:G18)
20Cash Flows from Financing Activities
21 Taking up of a long term loan 12000
22 Payment of Dividends to Share Holders-500
23 Net Cash Flow from Fin. Activities11500=Sum(G21:G22)
24Net change in Cash Balance 9040=G15+G19+G23
Let’s
first
clean this
up a bit
…
and then
look at it
in more
detail …
Incom
prehensible!!!
But difficult??

9. A Simple Cash Flow Statement
3
4
5
6Cash Flows from Operations
7 Receipts
8 Interest received from Investment 200
9 Payments from Customers 12000
10 Others 340
11 Disbursements
12 To suppliers -4800
13 To employees -5000
14 Others -200
15 Net Cash Flow from Op. Activites2540=Sum(G7:G14)
16Cash Flows from Investing Activities
17 Purchase of Equipment -6000
18 Sale of Equipment 1000
19 Net Cash Flow from Inv. Activities-5000=SUM(G17:G18)
20Cash Flows from Financing Activities
21 Taking up of a long term loan 12000
22 Payment of Dividends to Share Holders -500
23 Net Cash Flow from Fin. Activities11500=Sum(G21:G22)
24Net change in Cash Balance 9040=G15+G19+G23
Ever Profit International
Cash Flow Statement for the Year ended Dec 31, 1999 Use the
Center and
Merge
Button
Change the
Font
Make the
total bold
Underline
before the
subtotals
Make the
main items
italic

10. Some Notes
Many accountants compute the amounts for the Cash Flow
Statement by using the Income Statement and the changes
in the related Balance Sheet accounts.
This is often called the T-account approach. Of course this
only works if the relevant information is actually listed in
the Income Statement and Balance sheet.
Let us have a look at the items in the cash flow statement one
by one.

11. Elements of a Cash Flow Statement
Cash Flows from Operations
Receipts
Here the most important receipts from daily operations for the
business are listed. It is important to realize that the choice of what
to list and what not is dependent on the nature of the company.
Disbursements (Expenses)
Here the most important disbursements necessary for the daily
operations are listed. Again, the choice of what to list and what not
depends on the nature of the company.

12. Elements of a Cash Flow Statement
Cash Flows from Investing Activities
Purchase of Equipment
Most businesses cannot operate without some kind of investment.
In order to get (and keep) a company running, it needs to buy
certain equipment like e.g. computers and tools. Usually, such
items can be used for many years which is why they are not listed
under Cash Flow from Operations but separately.
Sale of Equipment
Of course one can also sell equipment previously bought. E.g. when
one wants to upgrade or when one no longer wants it. Think of
Singapore Airlines always wanting to have a nice new fleet. What to
do with those old planes? One option is to sell them.

13. Elements of a Cash Flow Statement
Cash Flows from Financing Activities
Long Term Loan
Knowing when and where to borrow money is an important aspect
of management. If you borrow at the wrong moment at the wrong
place you might end up in trouble. (Think Asian Crisis). On the
other hand, if you have a great idea and give up on it due to lack of
funds you might loose a fantastic opportunity.
Since cash inflows (or outflows) due to loans are not part of daily
operations, they are listed separately here.
Payment of Dividends
Of course the idea of ‘investing’ in a company as a shareholder is
to get more money back than one puts in. Some companies return a
part of their profits to the shareholders as dividends as a kind of
interest on their shares (note: this is usually a rather small amount).

14. Elements of a Cash Flow Statement
Net Change in Cash Balance
The net change in cash balance is an important indicator
for how well the company will be able to continue doing
business.

If the net change is strongly negative and the company has
little or no cash left, it will almost certainly need new
loans. It is good to know that one needs to plan for that.

On the other hand if the cash flow is positive and there are
little debts, extra cash for new investments or for
dividends will be available.

15. Now let us look at how we can actually obtain some of the
items from the Balance Sheet and the Income Statement.

Cash Flow from Operating Activities

Receipts

Disbursements
Generating the Statement
Payments from
Customers
=Sales - Change in Accounts
Receivable
To Suppliers=Cost of Goods sold + Change in
Inventory – Change in Accounts
Payable (for Inventory)

16. Key Points of the Day
The Cash Flow Statement provides important information
regarding the cash requirements of a company.
(Parts of) the Cash Flow Statement can be derived from
the Balance Sheet and the Income Statement by analyzing
changes.
https://www.accountingcoach.com/cash-flow-statement/qu
iz

17. NEXT…….

18. The Profit and Loss Account

19. Calculating the profit or loss of a
business

20. Types of financial analysis
Many types of financial reports are concerned with planning
ahead.
These include cashflow forecasting, break-even analysis
and budget setting.
Others are concerned with reporting results at the end of
the year.
These include the profit and loss account and the balance
sheet.

21. The purpose of a profit and loss
account
It summarises all the sales revenue for the financial year.
It summarises all the payments or expenses for the
same year.
The difference between the two totals is the profit or loss
made in that year.

22. Why produce a profit and loss
account?
It is a legal requirement. Tax is paid on
the profit.
It summarises all the year’s transactions – as recorded in
documents such as invoices.
It shows the financial ‘health’ of the business.
It is studied by managers, shareholders, banks, financiers
and other relevant groups of people.

23. The structure of a profit and loss
account 1
Top part is concerned with gross profit, e.g.
£
Sales 300,000
Cost of sales 100,000
Gross profit 200,000
Note: cost of sales is the same as ‘cost of
purchases’. It is deducted from sales.

24. The structure of a profit and loss accounts 2
Second part is concerned with net profit, i.e. gross profit minus
expenses.
£
Gross profit 200,000
Expenses
Salaries 55,000
Rent 10,000
Other 5,000
Total expenses 70,000
Net profit 130,000

25. Your turn!
Sales
Cost of sales
Gross profit
Expenses
Salaries
Rent
Electricity
Other
Total expenses
Net profit
£
68,000
12,000
5,000
5,000
£
320,000
160,000
??
??
??
160,000
90,000
70,000

26. Computers and the profit and loss
account
Spreadsheets can be used to compile profit and loss
accounts
Business accounts packages automatically produce profit
and loss accounts
Advantages include speed, accuracy, instant access to
information
Problems occur if wrong data entered, wrong commands
entered, any data is lost or corrupted.

27. TQ