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ACF 212

PRINCIPLES OF FINANCIAL ACCOUNTING LECTURES 3 and 4

Lectures 3 & 4 reading

• Elliott & Elliott, 15th ed., Chapter 5

– Good on the background, ‘rules and regulations’, analysis of C/F Statements, less good on actually producing a C/F Statement.

CASH FLOW STATEMENTS

(incorporating aspects of slides by Paul Taylor and Sayjda Talib)

• Paul Taylor “Preparing Cash Flow Statements” (in the study pack)

– Good on producing a C/F Statement. – (Don’t worry about the material on FRS1)

THE PRESENTATION OF FINANCIAL INFORMATION

It used to be said (and quite often still is) that there are three primary financial statements: • One dealing with financial performance [=the P&L a/c or I/S or the Comprehensive Income Statement – see later in the course] • One dealing with financial position [=Balance Sheet] • One dealing with cash inflows and outflows [= Cash Flow Statement]

THE PRESENTATION OF FINANCIAL INFORMATION

You are used to the P&L (I/S) and the B/S. They provide lots of useful information. So why is a C/F statement needed? After all, in AcF 100/111/261, you spent some time learning about the advantages of accruals accounting over cash accounting. • That’s the point: accruals and cash accounting show different things and each can be useful in certain circumstances. • • • •

Accruals vs. Cash

• An expense = the expired cost of an item ≠ (necessarily) the cash spent on it. • E.g. Buy a fixed asset for £5,000, use straight line depreciation over 5 years:

– Cash flow this year = -5,000 – Expense this year = -1,000

Accruals vs. Cash

• Revenues may be more subtle: • E.g. Sales in the year = 10,000 • Cash received in the year may indeed be 10,000, or; • 8,000 (if not all debtors pay by year end), or; • 12,000 if all this year’s customers pay, as do 2,000 opening debtors

Accruals vs. Cash

• Also, cash flows may result from items not impacting on the P&L a/c (I/S). • Examples • Receipts: Issues of shares Sales of debentures • Payments:...