FRS 1 (Financial Reporting Standard 1) requires companies to prepare a Cash Flow Statement as part of their financial reporting. This statement provides a detailed breakdown of the cash inflows and outflows during a specific accounting period, categorized into Operating, Investing, and Financing Activities. The objective of FRS 1 is to offer transparency regarding how companies manage their cash resources, ensuring consistency and comparability across financial statements.
1. Cash Flow Statement for XYZ Ltd (Prepared According to FRS 1)
| XYZ Ltd | |
|---|---|
| Cash Flow Statement for the Year Ended 31 December 2023 | |
| Description | Amount ($) |
| Cash Flows from Operating Activities: | |
| Net Profit Before Tax | 100,000 |
| Adjustments for Non-Cash Items: | |
| Depreciation | 20,000 |
| Amortization of Intangible Assets | 5,000 |
| Interest Expense | 8,000 |
| Loss on Disposal of Fixed Assets | 3,000 |
| Operating Profit Before Working Capital Changes | 136,000 |
| Increase in Trade Receivables | (10,000) |
| Decrease in Inventories | 7,000 |
| Increase in Trade Payables | 12,000 |
| Cash Generated from Operations | 145,000 |
| Income Taxes Paid | (20,000) |
| Net Cash from Operating Activities | 125,000 |
| Cash Flows from Investing Activities: | |
| Purchase of Property, Plant, and Equipment | (50,000) |
| Proceeds from Sale of Fixed Assets | 10,000 |
| Purchase of Investments | (15,000) |
| Interest Received | 4,000 |
| Net Cash Used in Investing Activities | (51,000) |
| Cash Flows from Financing Activities: | |
| Proceeds from Issue of Share Capital | 40,000 |
| Proceeds from Long-Term Borrowings | 30,000 |
| Repayment of Borrowings | (25,000) |
| Dividends Paid | (15,000) |
| Interest Paid | (8,000) |
| Net Cash from Financing Activities | 22,000 |
| Net Increase in Cash and Cash Equivalents | 96,000 |
| Cash and Cash Equivalents at Beginning of Period | 50,000 |
| Cash and Cash Equivalents at End of Period | 146,000 |
2. Explanation of the Cash Flow Statement
A. Cash Flows from Operating Activities
The operating activities section starts with the Net Profit Before Tax and adjusts for non-cash expenses such as depreciation, amortization, and losses on asset disposals. Additionally, changes in working capital components like receivables, payables, and inventory are included. For XYZ Ltd, the net cash generated from operations after tax payments is $125,000.
B. Cash Flows from Investing Activities
Investing activities involve the acquisition and disposal of long-term assets. XYZ Ltd purchased new equipment worth $50,000, sold some fixed assets for $10,000, and invested $15,000 in securities. Interest received from investments was $4,000. The net result was an outflow of $51,000.
C. Cash Flows from Financing Activities
Financing activities detail cash flows related to the company’s capital structure. XYZ Ltd raised $40,000 from issuing new shares and obtained a long-term loan of $30,000. The company also repaid $25,000 of its existing borrowings and paid dividends of $15,000. Interest payments amounted to $8,000. This led to a net positive cash flow of $22,000 from financing activities.
D. Net Increase in Cash and Cash Equivalents
The total net increase in cash and cash equivalents for XYZ Ltd was $96,000. The company’s cash balance increased from $50,000 at the beginning of the year to $146,000 at the end of the year.
3. Key Takeaways from the Cash Flow Statement
- Operating Efficiency: A strong cash flow from operating activities ($125,000) indicates that the company’s core operations are generating sufficient cash to cover expenses and investments.
- Investment Strategies: The company’s investment in fixed assets and securities reflects its focus on future growth, although it resulted in a net cash outflow of $51,000.
- Financing Decisions: XYZ Ltd’s use of both equity and debt financing demonstrates a balanced approach to raising capital, leading to a net positive inflow from financing activities.
- Liquidity Position: The overall increase in cash suggests a strong liquidity position, providing flexibility for future investments or debt repayments.
4. Understanding FRS 1 Cash Flow Statements
The Cash Flow Statement prepared under FRS 1 offers a clear and standardized view of a company’s cash movements across operating, investing, and financing activities. It provides valuable insights into a company’s financial health, operational efficiency, and capital management strategies. The example of XYZ Ltd illustrates how businesses generate and utilize cash over an accounting period, helping stakeholders make informed decisions regarding the company’s financial performance and future prospects.