Summary of ACCA FR Article on IAS 7 Financial Reporting
Relevant to ACCA Qualification Paper Financial Reporting (FR)
Analysing financial statements is a major part of FR exam rather than number crunching.
When performing analysis on SOCF, don’t just comment on overall movement in cash and cash equivalent figure. Explain the reason behind it. The positive movement doesn’t necessarily mean well performance of company.
The positive movement might be because of cash generation from selling assets rather than through core operations and this isn’t good for sustainability of company.
The company may generate cash now by selling asset but may find difficulties in future because no assets will be left. Because of this, company find difficult to raise finance from bank in future as no asset left for collateral and is poor cash management.
Cash generated from operations is normally the cash profit from operations. Hence, compare cash generations from operations with the operating profit to see how much profit earned is turning into cash. The closer the two figures is better. The huge difference between two indicate short term liquidity problem.
Also look Movement in working capital. Large increase in receivables and inventory indicate problem for the cash flows of the business. Similarly, if cash from operations is positive, this could also mean large increase in payable balance and mean delaying payment to improve cash flow position.
The cash from operations should be positive and enough to cover interest payments and tax.
Any cash left after interest and tax is free cash and can be used to pay dividend or for further investment or pay back loan. The further investment from this cash is best case as no need to raise finance or issue shares to further invest. (The raising of finance through bank loan will increase gearing and increase interest payments and through share issue will increase shareholders and hence higher dividend).
Written by a member of CCA BOD Team in assistance with recent article by FR examiner.