Cash Flow Statement

Cash and cash equivalents, operating, investing and financing activities, the indirect method, working capital changes, machinery bought and sold, and the net change in cash.

Key ideas

• Cash equivalents are short-term, highly liquid investments with little risk of change in value, such as treasury bills maturing within three months.
• Operating activities are the main revenue-earning ones: receipts from customers, payments to suppliers and employees, income tax paid.
• Investing activities buy and sell long-term assets and investments; for a non-financial company, interest and dividend received are investing too.
• Financing activities change capital and borrowings: issuing shares, raising or repaying long-term loans, paying interest and dividend.
• The indirect method starts from net profit before tax, adds back depreciation, finance costs and losses on sale, and takes out profits on sale.
• An increase in a current asset is deducted and a decrease added; an increase in a current liability is added and a decrease deducted.
• Transactions with no cash, such as buying an asset by issuing shares, are left out.

Remember

Watch out

• Showing interest paid on debentures under operating activities instead of financing.
• Adding an increase in trade receivables instead of deducting it.
• Leaving a profit on sale of machinery in operating profit instead of taking it out.

Worked example