cash flow and contemporary issued

CASH FLOW AND CONTEMPORARY

ISSUESModule title = Financial Reporting And Management

Module code= BM611ST

BUCKS ID = 21517728

Name= Nisal Thanippuli Appuhamilage Don

1 CASH FLOW AND CONTEMPORARY ISSES

CONTENTS PAGE

01. Executive summary ……………………………………………… . 202. IAS 07 Statement of cash flow ……………………………………. 3

2.1 Introduction and importance………………………………… 32.2 Objective…………………………………………………… 42.3 Scope………………………………………………………… 4 2.4 Benefits……………………………………………………… 42.5 Limitation…………………………………………………… 5

2.6 direct and indirect method………………………………… 52.7 Operating cash flow for the British Assets Trust PLC…… 5-6

2.8 Interpretation of the company liquidity…………………… 7-9 (Based on information in cash flow of British Assets Trusts PLC)

03. Creative accounting…………………………………………………… 103.1 definitions and explanation of creative accounting…………… 103.2 deference of creative accounting and economics pressure. …… 103.3 ethical perspective of creative accounting……………………… 11

04. Historical cost accounting……………………………………………… 12

4.1 current cost accounting…………………………………………… 12

4.2 current purchasing power accounts……………………………… 13

4.3 Real terms system of accounting…………………………………… 13

05. Conclusion…………………………………………………………………… 14

06. Bibliography………………………………………………………………… 1506. Appendix. …………………………………………………………………… 16-17

NISAL THANIPPULI APPPUHAMILAGE DON –STUDENT ID-21517728


01. Executive summary

The cash flow statement (IAS 07) is one of the main criteria of this assignment. Under that explained the importance, the scope, the benefit and the objective. Second criteria of this assignment explanation of definition, ethical view of creative accounting

In other criteria of this assignment is calculation of net cash flow from operation activities and interpretation of liquid opposition of British Assets Trust PLC.

Finally discussed about cost accounting method, and how it deference form historical cost accounting with advantages and disadvantages of these method.



02. IAS 07 Statement of cash flow.

2.1 Introduction and importance.

The statement of cash is useful additional financial information, which provides measure of

performance to stakeholders of the business (cash and cash equivalent).Income statement is not

only a source, which always evaluate to performance of the business. Therefore reported amount

of profit misguide the stakeholders.

Two reason are given below to misguide of reported profit,

I. Shareholders expectations are depending on the profit during the year. When the

company profit after tax (PAT) is increased than previous year, they are expecting that

the entity will pay profit as a dividend; actually it is depends on the company and the

sufficient available cash to pay the dividend.

II. Same situation; profit is increased more than previous year; employers are expecting

high salaries and wages. But it is completely wrong; it is depending on the company and

whether the company has available cash and cash equivalents.

The company can make projections by using cash inflows and cash out flows. User of financial

statements, they can identify trends and projection changers in financial position. Every day new

trends come to the world. Therefore company projection should be matched with all these new

trends.

A historical analysis of cash flow provides/help to understand prepare reliability of projection for

near future. Cash balance can be matched with firm’s required cash during the year. The

statement cash flow is preparing for financial changes on cash basis. It is summarized the causes

of changes in cash position between two dates balance sheet.



2.2 OBJECTIVE

According to IAS07 cash flow provides to user of statement of cash flow available the generated

cash and cash equivalent and as well as needs have cash and cash equivalent. Fewer than three

main categories calculate separately generated cash and cash equitant of during the year using

historical information.

2.3 Scope.

A statement of cash flow necessary to presented as part of financial statement. All type of

entities in cash flow statement provides useful information to identify their nature of business.

Basically direct or indirect cash flow categorize to three main activities, there are operation

activities, financial activities and investment activities. Therefore stakeholder of business, they

can identify easily profit of business, depreciation of assets and payable and receivable account

changes.

Under invest activities, stakeholders can take more information. It shows owners’ equity changes

during the year. These are importance factors for investors to take decision at the investing in

business. Further stakeholders can take an idea about non-current and current assets increase or

decrease.

Finally under finance activity, that is mainly focused on borrowings and company paid dividend

to shareholders. When paying borrowings of the company, liability will reduce, therefore assets

increase more than liabilities. Amount of the paid dividend is important the for next year

investments of the company. If it is higher amount, more investors are interest to invest in the

company.

2.4 Benefits.

Main purpose of preparation of financial statements is basically reporting healthy of business to

stakeholders, potential investors and lenders. Net cash flow form will show the net earnings

during the year. Statement of cash flow provides useful information for its stakeholders to

anticipate the future cash flow requirement entity. Further examine entity of cash flow; user can

identify ability to generate cash flow in the future.



Other important thing is cash flow provides changes in assets / equity of entity. These changes in

entity may help to evaluate nature of business.

II.5 Limitations.The statement of cash flow doesn’t provide whole picture of the business during in the year.

Because it is excluding non-cash changes in the business. Therefore non-cash items increase or

not, it’s not affected to statement of cash flow.

Balance disclosed by cash flow therefore can’t be evaluated real liquidity position. Post

purchased balances are affected to actual liquidity position of company.

2.6 Direct and indirect methods:

The above operating cash flow prepared according to the indirect method disclosing the

additional information compared to the direct method such as,

Non cash item adjustments for profit before tax figure according to British Asset Trust,

Finance cost, gain on investment and exchange differences has been separately shown making it

easier for the decision makers.

Other than the direct method, indirect method gives clear idea about the cash balance at the end

and the profit before tax figure which has set according to the accrual basis.

2.6 Operation cash flow for British assets Trust PLC (Indirect method).British assets trust is a financial service provider. It is established in 1898 and the company decided larger investments and major international business.

(Anon., 2014)

This company is prepared their cash flow statement according to direct method.



British Assets Trust PLCCash flow for the year ended 30th sep. 2014

Operations activities £(‘000)

Profit before taxationAdjustment to reconcile to cash provided by operationFinancial costGain on investmentExchange difference

Changes in working capitalIncrease in investment incomeOther cash payment

Net cash inflow from operation activities

(w1)(w2)

27,290

4,171 (9,596) 969

318 3

21,217

(Table 1)

Working’s (1)

Accounts Receivable income Increase/decrease

Investment income 23,753 23,435 318

Deposit interest 32 32 _

Option premiums 114 114 _

Underwriting commission 27 27 _

(Table 2)



Working’s (2)

Paid Expense Payable

Management expense 2,001 2,001 _

Other cash payment 708 711 3

(table 3)

2.8 Interpretation of the company liquidity.(Based on information in cash flow of British Assets Trusts PLC)

2014£ (‘000)

2013 £(‘000)

w %Increase/decrease

Current assets 20,210 37,666 1 46.34%

Current liabilities 24,482 48,072 2 49.07%

Current Ratio 1:0.82 1:0.78

2014£ (‘000)

2013£ (‘000) w

%Increase/decrease

Purchase of investments 351,175 344,590 3 1.91%

Sales of investment 356,482 344,617 4 3.44%

Net cash from capital exp. And financial investment

5,307 97



Workings 1 Current assets = 37,666-20,210 x 100 = 46.34% 37,666 2

Current liability = 24,482-48,072 x 100 =49.07%

48,072

2014 2013

Current ratio = 20,210 37,666

24,482 48,072

1:0.82 1:0.78

3

Purchase of investments = 344,590-381,175 x 100 = 1.91%

381,175

Sales of investments = 344,617-356,482 x 100 = 3.44%

356,482

2013

Net cash flow from operation activities = 344,590-344,617 = 97

2014

= 351,590-356,482 = 5,307



According to calculated ratios in the British assets trust PLC

British Asset Trust plc as a service providing company may focus on its liquidity position

comparing with its profit and the cash balance of £14,790,000, which is much a 1.3% small

improvement compared with the previous year 2013.

The working capital management seems not that great according to the balance sheet. The net

current liabilities give a bad balance and that is also with an increase of 49.7 %( w2).Comparing

to 2013 with an impact from current assets by 46.34 %( w1), this is showing a huge change in

the company accounts, but not in the overdraft balance. And net increase in investment income

in cash flow gives a positive idea to make the sense, where the new purchases of investments as

well as ordinary shares treasure in the company, which is higher than 2013.

Even though the company accounts show some negative sides in working capital management, It

is acceptable to consider the new investment, which are financed by the company. Meaning of

the liquidity position of the company doesn’t show any bad situation and it would be more

possible to have a better idea about the company by looking at the industry positions as a bench

mark.



03) Creative accounting.

3.1 Definitions and explanations about creative accounting.

According to few authors, they defined as it is,

“A process whereby accounts use their knowledge of accounting and rules to manipulate

the figure reported in the account of business” ( Amat, Blake & Dowds .1999)

The managers in the company use knowledge of accounting and rules, when practice

creative accounting to represent manipulated accounting figures.

……………..

According to financial accounting standard board in USA, they says “generally accepted

accounting principle “(GAAP) (stice and stice , 2006 ,p,13)

This is another definition about the creative accounting. It says, when managers are making

creative accounting, they are following accounting principles. Therefore they don’t violate

the accounting principles.

……………..

According to an other definition; “Academic view of creative accounting is transaction of

financial figure from what they actually are to what preparer’s desire by taking advantage

of the existing rules and ignoring some or all of them.” (kamal naser.1993.2)

Base on these definitions, creative accounting is a process to manipulate accounting

figures to follow accounting principles and rules representing accounting reporting method.

3.2 Difference of creative accounting and economics pressure.

Creative accounting is mostly related with economics pressures because it comes out as a

result of itself. The companies have to choose difference accounting method to write off

expenditures. Therefore company has chosen a method to writing off development

expenditures that gives to represent their preferred image of accounting figures.



Certain entries in accounting are related to unavoidable estimations. Such as when

estimating a useful- life of asset in order to make the calculations of depreciation. So it’s

affecting too many reasons from outside of the business. Therefore creative accounting has

the opportunity to optimize in making the estimations.

Creative accounting may help maintaining and borrowings in the company. Therefore it’s

making less risk level and creating a good profit.So the company can issue new shares to

increase the capital.

3.3 Ethical perspectives of creative accounting.

Companies generally favor to report a steady style of growth in profit rather than to show

explosive profits with an order of affected rises and falls. This is attained by making

without need high provisions for liabilities and compared to asset values in good years so

that these provisions can be reduce, by this means improving reported profits, in bad years.

Advocates of this approach argue that it is a measure against the 'short-term' of refereeing

an investment on the basis of the earnings achieved in the speedy following years. It also

circumvents raising anticipations hence great in good years.



04 Historical cost accounting.

Historical cost accounting is the way to keep value of assets in nominal or original cost on balance sheet, when it’s acquired by the company.Historical cost has been using in the first stage of accounting field. But still it is using this method. Because of modern accounting techniques could not give a successful answer to the problems of historical accounting technique. Therefore many companies have to follow this technique till succeed answer will give from modern accounting techniques.

4.1 current purchasing power accounts. This is the concept, which is used to evaluate all of the accounting into current price level. These changes are depending on current price changes, in other hand mapping inflation.

Advantages CPP method gives more reliable information for management to take relevant

decisions. When following CPP method, financial statements are prepared in advance. CPP method facilities to evaluate loss or gain on company cash items. CPP method controls common purchasing power to measure particular unit. So that

comparing is easy. CPP method ensures shareholder expectation to increase intact of purchasing power

capital. Therefor this method more valuable for shareholder point of view.

Disadvantages

It is too difficult to find real price changes given on time. CPP process reflects an only change in general purchasing power.it doesn’t show

the changes in the value of separate objects. CPP technique fails to take out the faults of historical accounting system.



4.2 current cost accounting.

Current cost accounting values assets at their current replacement cost rather than at the amount originally paid for them, the method taken by historical cost accounting. Current cost accounting are drawn up by corrections the historical cost for upturn or downturn and the usual correction such as for depreciation.

Advantages. It addresses the difference among the current and historical costs by way of a result of

the inflation.

Disadvantages. This method presents the challenges to the operators and businesses about the informed

financial figures.

4.3 Real terms system of accounting.

If the companies maintain value in real terms system, it affect of changing price measured to their effects the company financial capital.

When following real terms technique have addressed too many problems of the historical accounting. Why it has taken realistic value of non-current assets. Current cost accounting has reduced insufficient provision and depreciation.

But new techniques don’t gives successful answers always



05. Conclusion

There are three main sides have been covered by this report. Cash flow statements (IAS 07),

creative accounting, historical cost accounting and current costing methods further how the

indirect cash flow method turns into the direct method cash flow in British assets trust PLC.

When concerning about the cash flow of British assets trust PLC, it have been at positive in 2014

but liquid level of company are not at satisfied level. Management should consider it and use

new strategic to minimize it.

Creative accounting method is more useful. But it is mismatch with long term forecasting.

It is more suitable for short-term forecasting. historical cost accounting method should be

improve as above mention in the report



06. Bibliography

Anon., 2014. british assets trust annual report, london: s.n.

Amat, 0. and Blake, J. (1996) Contabdidad Creativa, Barcelona: Gestión 2000.

Anon., 2009. accounting management. [Online] Available at: http://accountlearning.blogspot.com/advantages-and-disadvantages-of-current.html[Accessed 26 march 2015].

pandey, I., 2010. cash flow statement. In: Financial Management. Delhi: vikas publishing house pvt LTD, p. 562.



07. Appendix

1

2

3



4


cash flow and contemporary issued

Leadership & Management