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A cash flow statement is described under IAS 7 as a statement that shows the movement of funds in an organization. 1The main purpose of preparing a cash flow statement is to provide data on all the cash inflows and outflows of a firm. It is a statement that is useful to not only the insiders but also the outsiders of the organization. Lenders and prospective lenders to the organization will be in a position to establish the status of the organization in terms of its cash flows and its ability to repay its obligations. This usually includes all the cash inflows and outflows and negates the non cash items like amortization and depreciation.
Cash flow from operating activities
This is an indirect way of preparing a cash flow statement. Since the firm got a loss, this does not represent an actual flow of cash, and so adjustments have to be made to get an actual figure for the cash outflow or inflow from operations2. This will call for the addition of noncash items that had been recognized as expenses and thus had been added, for example, Amortization of surface mine development and restoration assets, which had previously been recognized as an expense yet did not include an actual out flow of funds. Another example of an item that does not involve the flow of cash is the net increase in the fair value of the assets.
The increase indicates that in the previous year, there had been a decline in the value of the assets. However, in 2008, there was an increase in the fair value of assets. This, however, does not involve an actual inflow of cash and, therefore, the need to carry out adjustments.
|Increase in fair value of assets||6 months to June 2009||6 months to June 2008|
At the same time, we shall deduct those revenues that were recognized in the income statement, yet they did not include an actual inflow of funds. An example of this is the “Share of post-tax profit from joint ventures” that had previously been recognized as revenue. Upon the adjustments, the figure obtained is the cash used or from operating activities. There was an increase in this figure to (31,508) from (27,425). This means there was an increase in the operating costs, possibly from an increase in inflation and inefficiencies by the firm.
Cash from investing activities
This figure is used to represent the net inflows or outflows realized from investments in stocks, assets, and bonds. It will represent dividends received or paid, interest received or paid, and proceeds from the sale of any ventures by the firm. Cash inflows received will be added to the cash from operating activities while the outflows paid will be deducted from the same figure. There was a decline in the cash that was used in investing activities to 8,974) from (12,869). This is majorly attributed to the proceeds realized from the sale of a joint venture and the proceeds from the disposal of investment properties. Although there was a tremendous increase in purchase of operating property, plant and equipment, this was not substantial enough to increase the cash from investing activities.
Cash flows from financing activities
This relates to the net amounts that are utilized or received from activities that are to uphold the capital of the firm. This includes activities that affect movement of equity and debt capital. Some financing activities do not involve cash outflows or inflows and should be recorded since future payment of cash is not eliminated3. As for coal, there was a huge decline in the cash generated from financing activities.
This is attributed to the repayment of the loans and non taking of more loans. The value will have been much less save for the huge increase in net proceeds from generator loans and prepayments. At the end of the cash flow statement, cash and cash equivalents at the beginning are added to the net cash flows for the year to give a figure that is equivalent to the cash and cash equivalents at the end. 4Cash and Cash equivalents refer to those asset items that are easily convertible into cash. They will include among other notes receivable and marketable securities.
At the end of the adjustments, the cash and cash equivalents at the beginning when added to the net cash flows for the year will give the cash and cash equivalents at the end of the year. In the example, the cash and cash equivalents at the beginning were 42,336 and 28,766 respectively giving a total of 71,102. Having adjusted for the net receipts for the insurance premiums received, the figure for cash and their equivalents amounted to 36912.
There was a general decrease in the cash and cash equivalents from 40300 to 36912. This has the implication that the liquidity position of UK coal was at a worse position than it was in the previous year. The firm when met with current financial obligations will be in a worse position than the previous year.
The cash and cash equivalents movement has been summarized in the table below:
|June 2009||June 2008||Decrease|
In conclusion, the management of cash in the organization is of great essence. As an organization UK Coal needs to not only have an effective maintenance of the flow of cash. The liquidity position of the firm is very essential in giving information to both creditors and potential lenders of the firms’ ability to repay the obligations due to them. Currently the firm seems to be in a fair position to meet its obligations since it has a positive position in terms of the cash balances.
Tracy, J, How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, John Wiley & Sons Publishers, New Jersey, 2007.
Jackson, S, Sawyers, R & Jenkins, G, Managerial Accounting: A Focus on Ethical Decision Making, Cengage Learning Institute, New York, 2006.
Delaney, P & Whittington, O, Wiley CPA Exam Review 2009: Financial Accounting and Reporting, John Wiley & Sons, New Jersey, 2009.
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Warren, CS, Reeve, JM & Duchac, J, Managerial Accounting, South Western Cengage Learning Institute, New York, 2007.
- P Delaney, & O Whittington Wiley CPA Exam Review 2009: Financial Accounting and Reporting, John Wiley & Sons, New jersey, 2009. P.616.
- S Jackson, R Sawyers, & G Jenkins, Managerial Accounting: A Focus on Ethical Decision Making, Cengage Learning Institute, New York, 2006. P.539.
- CS Warren, JM Reeve, & J Duchac, Managerial Accounting, South Western Cengage Learning Institute, New York, 2007. P.533.
- J Tracy, How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, John Wiley & Sons Publishers, New Jersey, 2007. p. 90.