COURSE TITLE: Bachelor of Community Development

MODULE TITLE: Finance for Non-Finance Managers

MODULE CODE: FNF 402
UNIT 1: FINANCIAL MANAGEMENT
MODULE FACILITATOR : NDASHIKO TACHEBA
71796283
 UNIT 1
OVERVIEW OF FINANCIAL MANAGEMENT
Understanding Financial Management

 Communication with authority.

 Board room language.

 You are better able to focus on what is important.

 Succeed in making and taking better informed decisions.

 You become more effective.

 Operate with more authority.

 Get promoted faster and more often.

 INTRODUCTION

 In this unit, we will attempt to explain the nature of

financial management. The unit also examines the
objectives of financial management. It also explores the
functions of the financial manager/roles of financial
management.
 Objectives
 To familiarize participants with the main aspects of
accounting and financial management, such as principles
of financial statements and budget formation, cash flows
and income management.
 To demonstrate to participants how financial information
is analyzed, how it is vital for making management
decisions
 To train participants to effectively work with company‘s
financial statements.
 To exercise practical skills for forming budgets.
 Objectives
At the end of the unit, you should be able to:
 1. Define financial management
 2. State the objectives of financial
management
3. Describe the functions of the financial
manager/roles of financial management
 Definition
 FM is the efficient and effective management of
money in order to enable an organisation
achieve its objectives.
 It involves planning, directing and controlling
financial activities of an organisation. In other
words, financial management is the process of
planning and controlling of the financial
resources of a firm. It includes the acquisition,
allocation and management of firms‘ financial
resources.
 Definition
It is concerned with how best to manage
an organization‘s resources in order to
make sure that the resources are
maximized fully.
Financial management includes decisions
on how to raise capital and how to allocate
it both for long-term budget as well as
short-term.
 Planning
A business must plan for success. What does it
mean to plan? It is about deciding on a course of
action to reach a desired outcome. Planning must
occur at all levels. First, it occurs at the high level
of setting strategy. It then moves to broad-based
thought about how to establish an optimum
―position‖ to maximize the potential for realization
of goals.
 Planning
Finally, planning must give thoughtful
consideration to financial
realities/constraints and anticipated
monetary outcomes (budgets).
 Budgets
 A necessary planning component is
budgeting. Budgets outline the financial plans
for an organization. There are various types of
budgets. A company‘s budgeting process must
take into account on-going operations, capital
expenditure plans, and corporate financing.
 Operating Budgets
 A plan must provide definition of the anticipated
revenues and expenses of an organization, and
more. Operating budgets can become fairly
detailed. The process usually begins with an
assessment of anticipated sales and proceeds to
a detailed mapping of specific inventory
purchases, staffing plans, and so forth. These
budgets oftentimes delineate allowable levels of
expenditures for various departments.
 Capital Budgets
 The budgeting process must also contemplate
the need for capital expenditures relating to new
facilities and equipment. These longer-term
expenditure decisions must be evaluated
logically to determine whether an investment
can be justified and what rate and duration of
payback is likely to occur.
 Financing Budgets

 A company must assess financing needs,

including an evaluation of potential cash
shortages. These estimates enable companies
to meet with lenders and demonstrate why and
when additional financial support. The budget
process is quite important (no matter how
tedious the process may seem) to the viability of
an organization.
 Directing
There are many good plans that are never
realized. To realize a plan requires the
initiation and direction of numerous
actions. Often, these actions must be well
coordinated and timed. Resources must
be ready, and authorizations need to be in
place to enable persons to act according
to the plan.
 Directing
 By analogy, imagine that a composer has written
a beautiful score of music. For it to come to life
requires all members of the orchestra, and a
conductor who can bring the orchestra into
synchronization and harmony.
 Directing
 Likewise, the managerial accountant has a
major role in moving business plans into action.
Information systems must be developed to allow
management to manoeuvre the organization.
Management must know that inventory is
available when needed, productive resources
(people and machinery) are scheduled
appropriately, transportation systems will be
available to deliver output, and so on.
 Directing
In addition, management must be ready to
demonstrate compliance with contracts
and regulations. These are complex tasks
which cannot occur without strong
information resources provided by
management accountants.
 Controlling
Things rarely go exactly as planned, and
management must make a concerted effort
to monitor and adjust for deviations. The
managerial accountant is a major facilitator
of this control process, including exploration
of alternative corrective strategies to remedy
unfavorable situations
 Controlling
In addition, a recent trend is for enhanced
internal controls and mandatory
certifications by CEOs and CFOs as to the
accuracy of financial reports. This has led
to greatly expanded emphasis on controls
of the various internal and external
reporting mechanisms.
 Objectives of Financial Management

 The major objective of management is to

maximize the shareholders‘ wealth. The
shareholders‘ wealth is the present value of
future cash flows or present value of future
dividends payable to the shareholders infinitely.
The Shareholders wealth maximization is
gradually becoming the single and narrow
objective of firms pursued by financial managers
making it the most fashionable objective of the
firm.
 Objectives of Financial
Management
To ensure regular and adequate supply of
funds.
Survival of an organisation depends upon
the availability of money.
To maintain sufficient cash flow for
payment of day to day expenses.
To minimise borrowing, which increases
finance costs.
To ensure optimum funds utilisation. Once
the funds are procured, they should be
utilized in maximum possible way at least
cost.
To ensure safety on investment, i.e., funds
should be invested in safe ventures so that
adequate rate of return can be achieved.
To plan a sound capital structure -There
should be sound and fair composition of
capital so that a balance is maintained
between debt and equity capital.
Objectives of Financial Management

This is being achieved through a combination

of goals such as:
 Increase in the market share of the firm
 ii. Increase in reported profits
 iii. Continuous survival of the business
 iv. Provision of valued services to customers
 v. Ensuring public acceptability of the firm and
its products/services coupled with both social
acceptability and legal acceptability.
 Elements of Financial Management
Investment decisions :
 making decisions on capital expenditure,
including purchase of non-current assets. On the
other hand investments on current assets is
referred to as working capital investment.
 The financial manager should select the most
profitable investment portfolio that will reduce to
the barest minimum the risk of the organization
not maximizing stockholders‘ wealth.
 Elements of Financial Management

Financial decisions :
 raising of finance from various sources which
will depend upon decision on type of source,
period of financing, cost of financing and the
returns thereby.
 The maximum mix of finance of debt and equity
must be established to maximize the returns of
shareholders.
 Elements of Financial Management
(Cont’d)
Resource control – making a decision on
how to safeguard or conserve resources of
the organisation.
 Elements of Financial Management-
Summary
Estimation of capital requirements
Determination of capital composition
Choice of sources of funds
Investment of funds
Disposal of surplus (profit); i.e. dividends
or retained earnings
Management of cash
Financial controls
 Financial Management Systems
A financial management system is the
methodology that an organization uses to
oversee and govern its income, expenses,
and assets with the objectives of
maximizing surplus and ensuring
sustainability.
A set of implemented procedures that
track the financial activities of the firm.
 Features of a good financial
management system
Eliminating accounting errors
Keeping all payments and receipts
transparent.
Depreciating assets according to accepted
schedules.
Keeping track of liabilities.
Coordinating income and expenditure.
Balancing multiple bank accounts.
 Features of a good financial
management system (cont’d)
• Ensuring data integrity and security.
• Keeping all records up to date.
• Maintaining a complete and accurate audit
trail.
• Minimizing overall paperwork.
 Principles of a good financial
management system
Consistency: financial policies and
systems must remain consistent over time.
Accountability: Give an explanation to all
stakeholders how resources were used
and what has been achieved.
Transparency: your organisation must be
open about its work and its finances,
making information available to all
stakeholders.
 Principles of a good financial
management system(cont’d)
Integrity: individuals in an organisation
must operate with honesty and propriety.
Financial stewardship: take good care of
the financial resources received and
ensure that they are used for the purpose
intended.
Accounting standards: Follow accepted
standards for keeping financial records
and documentation.
 Financial management policies
Documentation policy
Debt collection policy
Supplier payment policy
Capital expenditure policy
Reserves policy
 Assessing the effectiveness of
financial management system
A system of scoring can be used to assess
the effectiveness of financial management.
Benefits of a good financial management
system
Make effective and efficient use of
resources.
Achieve objectives and fulfil commitments
to stakeholders.
Become more accountable to donors and
other stakeholders.
prepare for long-term financial
sustainability.
Benefits of a good financial management
system (cont’d)
 Gain the respect and confidence of funding
agencies, partners and beneficiaries.
 Gain advantage in competition for increasingly
scarce resources.
THE ROLE OF FINANCIAL MANAGEMENT
AND THE ECONOMIC ENVIRONMENT
 Learning outcomes and content

 Financial management &

 Role of financial strategy
 Influences on financial strategy including economic
goals of stakeholders an shareholder wealth
 Interaction between short-term goals and measures and
long- term financial strategy
 Economic environment in which organisations operate
 Introduction
Financial management is an integrated decision-making process concerned with
acquiring, financing, and managing assets to accomplish some overall goal within a
business entity
Financial strategy
An organisation financial strategy comprises the financial decisions which support the
long term goals of the organisation.
A company can meet day to day expenses, purchases and invest money to generate
wealth in such a way that the organization's objectives are achieved.

Financial strategy deals with areas such as financial resources, analysis of cost
structure, estimating profit potential, accounting functions and so on. In short, financial
strategy deals with the availability of sources, usages, and management of funds. It
focuses on the alignment of financial management with the corporate and business
objectives of an organisation to gain strategic advantage. The financial strategy of an
organisation will generally comprise three decisions.

 Investment decision
 Financing decision
 Dividend decision
 INVESTMENT DECISION
 The Investment Decision relates to the decision made by the investors or the top
level management with respect to the amount of funds to be deployed in the
investment opportunities. The investment decision can look at whether to invest in
long term projects as well as short-term investments. The investment decision is
very closely linked to the business strategy
 Investment decision:

It relates to the determination of total amount of assets to be held in the

firm, the composition of these assets and the business risk complexions of
the firm as perceived by its investors ;examples of the investment decision
include

• Replacement investments-the investment that is undertaken to replace a

firms plant and equipment which has become worn out or obsolete for
example new plant and machinery

• Mandatory investments- its an instruction to manage a pool of capital

,funds using a specific strategy and within certain risk parameters.
• Expansion investment-the use of capital to create more money through the
addition of fixed assets .
• Miscellaneous investments- are related itemized deductions which are
generally limited to the amount of expenses over and above adjusted gross
income.
LONG TERM EXPANSION:
 Investments in new plant and machinery
 Investment in developing new products or processes
 Entering a joint venture with another organisation
 Acquisitions of other organisations (takeovers)
SHORT TERM INVESTMENT
 Increasing the level of inventory or receivables Disinvestment
 Sale of surplus or obsolete assets
 Discontinuation of current products
 Disposal of business units, divisions or subsidiaries
 Financing decision
The financing decision involves two sources from where the funds can be
raised: using a company's own money, such as share capital, retained
earnings or borrowing funds from the outside in the form debenture, loan, bond
etc. coherent financial strategy means that the source, nature, amount and
riskiness of the finance used should be appropriate for the types of investment
decision being taken.
Two types are capital structure owners fund and borrowed fund.
The objective of financial decision is to maintain an optimum capital structure,
i.e. a proper mix of debt and equity, to ensure the trade-off between the risk
and return to the shareholders.
 Dividend decision:
The dividend decision is a decision made by the directors of a
company.it relates to the amount and timing of any cash payments
made to the company stockholders. The decision is an important one
for the firm as it may influence its capital structure and stock price, if a
business makes profit then that profit can be used to finance future
investments

This decision is primarily a concern for profit-seeking organizations. It

is very closely inter-related with the financing decision. If a business
makes profit then that profit can be used to finance future investments.
Alternatively they can be used to reward the owners of the business for
their investment by distributing the profits as a dividend.

.
 FINANCIAL OBJECTIVES AND STAKEHOLDERS

A fundamental financial objective of an organisation is the

maximisation of shareholder wealth. The three key
decisions (investment, finance and dividends) should be
adhered to when considering this objective.

Stakeholders are wide ranging groups with a vested

interest in an organisation, they may be internal, external,
or connected to the organisation. Management must
balance the needs and objectives of all stakeholders to
avoid conflict as each group are focused on furthering their
own interests. Stakeholders include:
 Financial objectives and stakeholders
Stakeholders do not have equal standing. Although shareholders are the most
important stakeholder group in a profit-seeking organisation, sometimes other
stakeholders have legal rights which override the importance of shareholders.
For example lenders have a legal right to their interest and loan repayments
whereas shareholders have no rights to income or capital from the company.
Employees are often guaranteed certain employment rights by law.

Shareholder wealth maximisation

Shareholder wealth maximisation is the primary goal of a profit- seeking

company. Shareholder wealth can be delivered in the form of dividends and/or
capital gain.
Shareholders invest in the company by buying shares in the company. In
return for their investment shareholders expect the company to generate
(yield) a financial return on that investment.
• Example of Shareholder wealth maximisation

• The market capitalisation of QRQ plc at 1 April 20X4 was P7 500 million.
QRQ plc generated profits after tax of P500 million in the year ended 31
March 20X5. The directors have decided to pay P100 million of the profits to
the shareholders as a dividend and they will invest the remaining profits in a
new product. When the investment project was announced to the stock
market the share price rose by
• 12% compared to a year earlier.
• Shareholder wealth has increased by P1 000 million in total as follows.

Cash dividend of P100 million. Total value of the ordinary share capital
increases P7 500 million x 12% = P900 million

• This example shows how shareholder wealth is not the same as profit. The
profit available to shareholders was P500 million but shareholders‘ wealth
increased by P1,000 million because of the lucrative new product.
 SHAREHOLDER WEALTH MAXIMISATION

A company that implements shareholder

wealth maximization indicates that its goal of
management is strive to maximize the return
in term of capital gain and dividend paid to
its shareholders. The ultimate objective of all
activity within the firm is the maximization of
shareholder wealth.
TSR = { (current price - purchase price) +
dividends } ÷ purchase price
Financial objectives and stakeholders
• Value for money (VFM)
• Value for money – achieving the desired level and quality of service
at the most economical cost. Assessing whether an organization
provides value for money.it involves looking at all functioning
aspects of the not for profit organization, the three E‘s:

Economy – minimizing the costs of inputs required to achieve a defined

level of output, for example materials and staff
• Efficiency – achieving a high level of output in relation to the
resources put in (input driven) or providing a particular level of service
at a reasonable input cost (output driven)
• Effectiveness – whether outputs are achieved that match the
predetermined objectives, i.e. the targets
Not-for-profit Organisations (NFPOs)

• There are many NFPOs. As the name suggests these are organisations
which do not have the creation of profit or wealth for shareholders as primary
objectives. Nonprofits are tax-exempt or charitable, meaning they do not pay
income tax on the money that they receive for their organization.

• Not for profit organisations would include the following types of organisation.

• Local authorities

• NHS and other government organisations

• Charitable organisations

• Voluntary sector associations (e.g. youth club networks or local sports

associations)
 UNIT 2
FINANCIAL STATEMENTS

STATEMENT OF PROFIT OR LOSS

STATEMENT OF FINANCIAL POSITION

STATEMENT OF CASH FLOW

 FINANCIAL STATEMENTS
Review of Basic Terms
 Asset & liability:
An asset is an economic resource that a company
owns.
A liability is a resource that the company owes.

 Book value & market value:

Book value is the amount of an asset or liability
shown on the companies‘ official financial
statements based on the historical, or original, cost.
Market value is the current value of the asset or
liability. In most cases, book value does not equal
market value.
 Review of Basic Terms cont’d

 Capital goods:
These are machines and tools used to produce
other goods.

 Depreciation & amortization:

Depreciation is a system that spreads the cost of a
tangible asset, such as machinery, over the useful
life of the asset.
Amortization is a system that spreads the cost of an
intangible asset, such as a patent, over the useful
life of the asset.
 Review of Basic Terms cont’d

 Fiscal year: A company‘s financial reporting year. In

most cases the fiscal year is not the same as the
calendar year.

 Profit margin: This is profit—what the company‘s

owners keep after paying all the bills—a percentage of
sales or revenues.
 Review of Basic Terms cont’d

 Receivables & payables:

Receivables are money owed to the company.

Payables are money the company owes to

others.
 Revenue & expenses:
Revenue is income that flows into a company.
Revenue includes sales, interest, and rents.

Expenses are costs that are matched to a specific

time period.
 Accounting terminology and jargons
(UK GAAP) vs IFRS)
UK GAAP IFRS
FINAL ACCOUNTS FINANCIAL STATEMENTS

TRADING AND PROFIT AND LOSS STATEMENT OF PROFIT OR LOSS

ACCOUNTS AND OTHER COMPREHENSIVE
INCOME

TURNOVER OR SALES REVENUE OR SALES REVENUE

SUNDRY INCOME OTHER OPERATING INCOME

INTEREST PAYABLE FINANCE COSTS

SUNDRY EXPENSES OTHER OPERATING COSTS

OPERATING PROFIT PROFIT FROM OPERATIONS

NET LOSS/PROFIT PROFIT/LOSS FOR THE
YEAR/PERIOD

BALANCE SHEET STATEMENT OF FINANCIAL

POSITION

FIXED ASSETS NON CURRENT ASSETS

NET BOOK VALUE CARRYING AMOUNT

TANGIBLE ASSETS PROPERTY, PLANT AND

EQUIPMENT

REDUCING BALANCE DIMINISHING BALANCE

METHOD METHOD

DEPRECIATION/DEPRECIATI DEPRECIATION CHARGE(S)

ON EXPENCE(S)
STOCKS INVENTORIES

TRADE DEBTORS OR TRADE RECIEVABLES

DEBTORS
PREPAYMENTS OTHER RECIEVABLES

DEBTORS AND TRADE AND OTHER

PREPAYMENTS RECIEVABLES
CASH AT BANK AND IN CASH AND CASH
HAND EQUIVALENTS
TRADE CREDITORS OR TRADE PAYABLES
CREDITORS
ACCRUALS OTHER PAYABLES

CREDITORS AND TRADE AND OTHER

ACCRUALS PAYABLES
LONG TERM LIABILITIES NON-CURRENT
LIABILITIES
CAPITAL AND RESERVES EQUITY(LIMITED COY‘S)

PROFIT AND LOSS RETAINED EARNINGS

BALANCE
MINORITY INTEREST NON-CONTRILLING
INTEREST
CASH FLOW STATEMENT STATEMENT OF CASH
FLOW
FINANCIAL STATEMENTS
 FINANCIAL STATEMENTS
• Financial statements are reports produced
to provide financial information about an
organisation.
• They are produced from the recorded
economic activities of the organisation.
• They are required in order to assist the
stakeholders to make informed decisions.
 Composition of Financial
Statements
• Statement of comprehensive income /
statement of profit or loss / income
statement.
• Statement of financial position / balance
sheet.
• Statement of cash flows
 ACCOUNTING REGULATIONS
Sources of accounting regulations are:
• Companies Act
• Accounting standards
 International Accounting Standards (IAS)
 International Financial Reporting Standards
(IFRS)
International Public Sector Accounting
Standards (IPSAS)
 Qualitative characteristics of
financial information
• Relevance: information is relevant if it has
the ability to influence the economic
decisions of users and is provided in time
to influence those decisions.
• Reliability: information is reliable if it is
free from material error or bias and can be
depended on to represent faithfully what it
purports to represent or could reasonably
be expected to represent.
• Comparability: users need to be able to
compare the financial statements of an
entity through time or the financial
statements of different entities. That
means similar items must be treated in the
same way.
• Understandability: information is
understandable if its users can appreciate
its significance. However information
should not be excluded from the financial
statements simply because some users
might not understand it.
 CONCEPTS IN FINANCIAL
STATEMENTS
• Concepts are terms that play a key role in
the preparation of financial statements.
• They are not reinforced by any accounting
body or government but help in producing
quality financial statements.
• The essential concepts are; going
concern, accruals, consistence and
prudence.
 Going Concern
• Implies that an organisation will continue
to operate in the foreseeable future.
• Financial statements are prepared basing
on this concept, except when it is planned
or foreseen that the organisation would
close down.
 Accruals Concept
• The concept requires that the effects of
transactions are reflected in the financial
statements in the period in which they
occur and not in the period in which any
cash involved is received or paid.
• For example; expenses such as rent are
recorded the period they are incurred and
not when cash is paid.
 Consistence Concept
• When an organisation has fixed the
method of accounting treatment of items
all similar items which follow should be
entered in exactly the same way.
• If a new accounting method is adopted, it
is to be followed to record all similar items.
 Prudence Concept
• A degree of caution must be applied in
making judgment where there is
uncertainty.
• An accountant should use figures that
would rather understate profits than over
state it or overstate costs than understate
them.
 STATEMENT OF
COMPREHENSIVE INCOME
Statement of Comprehensive
Income
• The primary purpose of the statement of
comprehensive income is to determine
and report on the revenue or earnings
generated during the period and match
against the expenses incurred to generate
it.
• It is designed to be read from top to
bottom as follows:
a) Revenue
b) Cost of sales
c) Gross profit
d) Expenses
e) Operating profit
f) Finance costs
g) Profit before tax
h) Tax
i) Profit for the year
 Revenue
• Revenue is the total income earned by an
organisation.
• It may include:
Income from sale of goods
Contributions received by an organisation
Interest earned, e.g. interest on bank
deposits
Grants
 Cost of sales
• Cost of sales are costs incurred in the
process of earning income. some
organisations use the term ‗direct costs‘.
• Examples include;
Costs associated with buying goods for
resale.
Costs associated with production of goods
(e.g. extraction of mineral).
Costs associated to offering a service.
 Gross profit
• Gross profit is the total profit earned
before paying for expenses.
• Examples of expenses:
Rent
Electricity
Salaries
Telephone bills
stationery
 Expenses
• Expenses can be analysed by their nature or
function.
• Classification by nature:
 Raw materials
 Depreciation
 Staff costs
• Classification by function:
 Distribution costs
 Administrative costs.
 Operating profit
• Operating profit is the profit earned after
paying all expenses, but before paying
interest charges to the financial lenders
and income tax.
 Finance costs
• Finance cost is the term used to describe
interest charged on borrowings (loan) by
lenders of money.
• Many organisations depend on borrowing
money from financial lenders such as
banks in order to run their organisations.
• This money is paid back with interest.
 Profit before tax
• Finance cost is subtracted from operating
profit to arrive at a figure known as ‗profit
before tax‘.
 Taxation
• Profit making organisations are required to
pay income tax.
• This is calculated on the profit made
during the year.
• It is deducted from the profit.
 Profit for the year
• This is the final profit after paying all costs.
• It is therefore profit that is retained for a
year.
• For non-profit making organisations the
term ‗surplus for the year‘ is used to
describe profit for the year.
 Activity
• List the sources of revenue for YOUR
ORGANISATION.
• List the direct costs that may appear in
the statement of comprehensive income
of YOUR ORGANISATION
STATEMENT OF FINANCIAL
POSITION
Statement of Financial Position
• A statement that shows the financial
position of the organisation.
• It is sometimes known as ‘balance sheet’.
• It shows the state of a company at a
particular time.
• It is like a ―snap shot‖ of an organisation,
since it records an image of an
organisation.
• It shows what the organisation owns and
what it owes to other parties.
• It lists all the assets and all liabilities of an
organisation at a particular date.
• The statement of financial position shows;
 Assets,
 Liabilities, and
 Capital (equity).
 ASSETS
• Assets are resources of an organisation.
• Meaning; what an organisation owns and
can lay its hands on.
• There are two types of assets;
Non-current assets
Current assets
 Non-current assets
• Non-current assets are assets acquired for
use within the organisation.
• They are to be used for more than one
accounting period.
• They are not bought for resell.
• Non-current assets are sometimes known
as fixed assets.
• They are shown as first assets on the
statement of financial position.
• Examples of non-current assets include;
Office equipment such as computers,
Office furniture,
Motor vehicles
Land and buildings
 Current Assets
• Current assets are shorter-term assets.
• Examples include;
Inventory,
Receivables (debtors),
Cash in hand, and
Cash at bank.
 Current assets (cont’d)
• They are listed in the statement of
financial position after non-current assets.
• Current assets are presented in the order
of their liquidity (how long it takes to
convert them into cash).
• The least liquid assets (inventories) are
listed as the first ones ending with the
most liquid assets (cash).
 Liabilities
• Liabilities are owings (debt) of an
organisation, i.e. what an organisation
owes other organisations or people.
• They fall into two categories;
• Non-current liabilities, and
• Current liabilities.
 Non-current Liabilities
• Non-current liabilities are debts to be paid
over a long period of time; i.e. in more
than one year.
• They are also known as long-term
liabilities.
• The most common example of non-current
liabilities is a bank loan.
 Current Liabilities
• Current liabilities are debts of the business
that must be paid in a short period of time
(within a year).
• Examples include;
Payables (credit suppliers)
Bank overdraft
 Equity
• Equity is the amount of money that
belongs to the owners of an organisation.
• This is the amount they invested in an
organisation and retained earnings.
• Equity is combined with liabilities in the
statement of financial position in order to
determine the total amount of money
used.
STATEMENT OF CASH
FLOWS
 Definition
• Cash flow statements are statements
prepared in addition to the statement of
comprehensive income and statement of
financial position.
• They are drawn to depict the sources and
uses of cash.
• They are useful because financial
statements alone may be misleading since
profit is not the only indicator of a
company‘s performance.
Purpose of statement of cash flows
• The primary purpose of the statement
cash flows is to provide information on the
company’s cash receipts and cash
payments.
• It provides different information than the
statement of comprehensive income which
provides users with performance of the
organisation.
• Statement of cash flows shows were the
cash came from and where it went.
 Contents of a statement of
cash flow
• The statement of cash flows contains
three sections;
• Operating activities
• Investing activities
• Financing activities
 Operating activities
• Operating activities are the principal
revenue producing activities of the entity,
including;
Operating profit
Inventories
Receivables
payables
 Investing activities
• Investing activities are the acquisitions and
disposal of non-current assets and other
investments.
• These activities relate to new investments
in assets which will generate future
income and cash flows.
• Examples of cash flows from investing
activities are;
• Cash payments to acquire non-current
assets,
• Cash receipts from the sale of non-current
assets
 Financing activities
• These are activities that result in changes
in the size and composition of the equity
capital and borrowings of the entity.
• Financing activities include cash flows
relating to;
 Financing activities (cont’d)
Issuing shares; cash proceeds from
issuing shares.
Cash payments to owners to acquire or
redeem the entity‘s shares.
Cash proceeds from issuing debentures,
loan notes, bonds, mortgages and other
short or long term borrowings.
Principal repayments of amounts
borrowed under finance leases.
 Advantages of a statement of
cash flows
• It shows an entity‘s ability to turn profit into
cash.
• Cash flow is a matter of fact and is difficult
to manipulate.
• Survival of a business depends on the
ability to generate cash.
• Cash flow is more comprehensive than
profit which is dependent on accounting
conventions and concepts.
 Advantages (cont’d)
• Creditors (long or short term) are more
interested in an entity‘s ability to repay
them than its profitability.
• Cash flow is easier to understand than
profit.
• Cash flow reporting satisfies the needs of
all users better
• Whereas profit might indicate that cash is
likely to be available, cash flow accounting
is more direct with its message.
• Cash flow forecasts are easier to prepare,
as well as more useful than profit
forecasts.
 Disadvantages of statements of
cash flow
• A high bank balance is not necessarily a
sign of good cash management.
• The statement of cash flows is based on
historical information and therefore it is not
necessarily a reliable indicator of future
cash flows.