Performance Measurement and Financial Reporting Prof Riccardo Tiscini

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Performance Measurement and Financial Reporting Prof. Riccardo Tiscini A. Y. 2014 -2015

Performance Measurement and Financial Reporting Prof. Riccardo Tiscini A. Y. 2014 -2015

IAS 7: Statement of Cash Flows

IAS 7: Statement of Cash Flows

Financial Statements FINANCIAL STATEMENTS comprise BALANCE SHEET INCOME STATEMENT CF STATEMENT Financial position at

Financial Statements FINANCIAL STATEMENTS comprise BALANCE SHEET INCOME STATEMENT CF STATEMENT Financial position at a specific moment of time Summary of revenues and expenses (profitability) for a period of time Summary of cash in and cash out for a period of time + STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY + NOTES TO THE ACCOUNT

Accounting methods for measuring performance ACCOUNTING METHODS CASH-BASIS ACCOUNTING ACCRUAL ACCOUNTING • Records only

Accounting methods for measuring performance ACCOUNTING METHODS CASH-BASIS ACCOUNTING ACCRUAL ACCOUNTING • Records only cash receipts and cash payments • Revenues recognized when earned; when firm sells/delivers goods or services • cash receipts = revenues; • cash payments = expenses • Expenses recorded when incurred (matched with revenues)

IAS 7: Statement of Cash Flows STATEMENT OF CASH FLOWS ITS PURPOSE IS TO

IAS 7: Statement of Cash Flows STATEMENT OF CASH FLOWS ITS PURPOSE IS TO SHOW THE SOURCES AND THE USES OF CASH DURING THE ACCOUNTING PERIOD THE CF STATEMENT CAN BE BROKEN DOWN INTO 3 CATEGORIES ACCORDING TO BUSINESS ACTIVITY

IAS 7: Statement of Cash Flows COMPONENTS OF THE STATEMENT OF CF OPERATING ACTIVITIES

IAS 7: Statement of Cash Flows COMPONENTS OF THE STATEMENT OF CF OPERATING ACTIVITIES Refer to cash flow received from customers and the amount of cash paid to suppliers, employees and others in carrying out the firm’s operating activity INVESTING ACTIVITIES It refers to cash inflows from selling existing land, buildings and equipment and cash outflows for the acquisition of non current assets and for the acquisition of equity or debt instruments of other entities and subsidiaries FINANCING ACTIVITIES It refers to cash inflows from short and longterm borrowing and from issues of stocks and cash outflows to pay dividends to shareholders, to repay borrowing

IAS 7: Statement of Cash Flows. Example CLASSIFY CASH FLOWS BY TYPE OF ACTIVITY

IAS 7: Statement of Cash Flows. Example CLASSIFY CASH FLOWS BY TYPE OF ACTIVITY a. b. Disbursment of € 96, 000 to merchandise suppliers OPER. c. d. Receipt of € 10, 000 from customers for sales made last accounting period OPER. Receipt of € 11, 000 from a customer for goods we’ll deliver next period e. f. FIN* Disbursment of € 16, 000 for interest expense on debt h. i. Acquisition of a building (€ 20, 000) by issuing note payable to a bank NO IMPACT INV Disbursment of € 7, 900 for a patent purchased from its inventor Receipt of € 200, 000 from issuing common shares FIN Disbursment of € 25, 000 to acquire land INV g. Disbursment of € 5, 000 to acquire shares of Apple INV j. Issue of common shares with market value of € 60, 000 to acquire NO land. IMPACT FIN k. Disbursment of € 10, 000 to reedem bonds at maturity l. Receipt of € 100 in dividends from Apple relating to shares acquired above INV*

IAS 7: Statement of Cash Flows COMPONENTS OF THE STATEMENT OF CASH FLOW OPERATING

IAS 7: Statement of Cash Flows COMPONENTS OF THE STATEMENT OF CASH FLOW OPERATING ACTIVITIES Cash Flow from Operating INVESTING ACTIVITIES Cash Flow from Investing >0 FREE CASH FLOW FINANCING ACTIVITIES Cash Flow from Financing

IAS 7: Statement of Cash Flows Inflows Sale of Goods- services Investing (INV) Sale

IAS 7: Statement of Cash Flows Inflows Sale of Goods- services Investing (INV) Sale of Non Current assets Financing (FIN) Issue of Debt And Equity Acquisition of Goods- services POOL OF CASH Operations (OP) Outflows Acquisition of Non Current assets Dividend – Debt Equity reduction

IAS 7: Statement of Cash Flows Cash received from sales of goods/services - Cash

IAS 7: Statement of Cash Flows Cash received from sales of goods/services - Cash paid for operating goods/services = CASH FLOW FROM OPERATING +- Cash received from sales of investments and property, plant and equipment - Cash paid for acquisition of investments and property, plant and equipment = CASH FLOW FROM INVESTING +- Cash received from issue of debt or capital stock - Dividends and reacquisition of debt or capital stock = CASH FLOW FROM FINANCING = NET CHANGE IN CASH FOR THE PERIOD

IAS 7: Statement of Cash Flows CASH FLOW FROM OPERATIONS +- CASH FLOW FROM

IAS 7: Statement of Cash Flows CASH FLOW FROM OPERATIONS +- CASH FLOW FROM INVESTING +- CASH FLOW FROM FINANCING = NET CHANGE IN CASH FOR THE PERIOD +- CASH, BEGINNING YEAR = CASH, END YEAR

Relations among Cash Flows Cash flow from: A B C D Operations (3) 7

Relations among Cash Flows Cash flow from: A B C D Operations (3) 7 15 8 Investing (15) (12) (8) (2) Financing 18 5 (7) (6) Net Cash Flow 0 0 A. New, rapidly growing firm C. Mature, stable firm B. Growing firm, more seasoned than A D. Firm in early stage of decline

IAS 7: Statement of Cash Flows To understand the preparation of a CF statement

IAS 7: Statement of Cash Flows To understand the preparation of a CF statement you must understand how changes in cash relate to changes in noncash accounts ASSETS = LIABILITIES + EQUITY CASH + NON CASH ASSETS = LIABILITIES + EQUITY CHANGE IN CASH + CHANGE IN NON CASH ASSETS = CHANGE IN LIABILITIES + CHANGE IN EQUITY CHANGE IN CASH = CHANGE IN LIABILITIES + CHANGE IN EQUITY - CHANGE IN NON CASH ASSETS

IAS 7: Statement of Cash Flows CASH FLOW FROM OPERATIONS DIRECT METHOD Cash received

IAS 7: Statement of Cash Flows CASH FLOW FROM OPERATIONS DIRECT METHOD Cash received from customers less cash disbursed to suppliers, employees, lenders, taxing authorities INDIRECT METHOD Net income for a period +depreciation +/- gain or loss on disposal +/- Δ working capital

IAS 7: Statement of Cash Flows. INDIRECT M. Net Income + Depreciation and Amortization

IAS 7: Statement of Cash Flows. INDIRECT M. Net Income + Depreciation and Amortization POTENTIAL CASH FLOW - Change (+/-) in current assets + Change (+/-) in current liabilities A) CASH FLOWS FROM OPERATING ACTIVITIES + Disinvestments - Investments B) CASH FLOW FROM INVESTING ACTIVITIES + Issue of equity capital + Long term financing - Distribution of dividends - Repayment of Debts - Redistribution of Equity capital C) CASH FLOW FROM FINANCING NET CASH FLOW (A+B+C)

IAS 7: Statement of Cash Flows. EXAMPLE ASSETS Cash Accounts receivable Buildings TOTAL ASSETS

IAS 7: Statement of Cash Flows. EXAMPLE ASSETS Cash Accounts receivable Buildings TOTAL ASSETS EQUITY AND LIABILITIES Accounts payable Salaries payable Bonds payable Common stock Retained earnings TOTAL SOURCES 200 X-1 6 105 185 296 200 X 62 6 100 28* 296 INCOME STATEMENT Sales revenue Cost of good sold Depreciation expense Salary expense Interest expense Net income * During the year 200 X the company declared and paid dividends of € 7 30 60 70, 00 160 200 X-1 40 5 0, 00 15 160 200 X 125 -71 -10, 00 -20 -4 20

IAS 7: Statement of Cash Flows. EXAMPLE PREPARE A STATEMENT OF CASH FLOWS USING

IAS 7: Statement of Cash Flows. EXAMPLE PREPARE A STATEMENT OF CASH FLOWS USING THE INDIRECT METHOD FOR CASH FLOWS FROM OPERATIONS

IAS 7: Statement of Cash Flows. DIRECT M. +Receipts from customers (revenues +- change

IAS 7: Statement of Cash Flows. DIRECT M. +Receipts from customers (revenues +- change in receivables) + other receipts - payment to suppliers (CGS +- change in payables) - payments to employees (Salary expense +- change in salaries payable) - interests* and taxes payments A) CASH FLOWS FROM OPERATING ACTIVITIES +- Disinvestments/Investments B) CASH FLOW FROM INVESTING ACTIVITIES + Issue of equity capital + Long term financing - Distribution of dividends - Repayment of Debts - Redistribution of Equity capital C) CASH FLOW FROM FINANCING NET CASH FLOW (A+B+C)

IAS 7: Statement of Cash Flows. EXAMPLE REFERRING TO THE EXAMPLE ON THE PREVIOUS

IAS 7: Statement of Cash Flows. EXAMPLE REFERRING TO THE EXAMPLE ON THE PREVIOUS SLIDES PREPARE A STATEMENT OF CASH FLOWS USING THE DIRECT METHOD FOR CASH FLOWS FROM OPERATIONS