CASH FLOW AND LIQUIDITY

CASH FLOW AND
CONTEMPORARY
ISSUES
Module title = Financial Reporting And Management
Module code= BM611ST
BUCKS ID = 21517728
Name= Nisal Thanippuli Appuhamilage Don

NISAL THANIPPULI APPPUHAMILAGE DON –STUDENT ID-21517728
1 CASH FLOW ANDCONTEMPORARYISSES
CONTENTS PAGE
01. Executive summary ……………………………………………… . 2
02. IAS 07 Statement of cash flow ……………………………………. 3
2.1 Introduction and importance………………………………… 3
2.2 Objective…………………………………………………… 4
2.3 Scope………………………………………………………… 4
2.4 Benefits……………………………………………………… 4
2.5 Limitation…………………………………………………… 5
2.6 direct and indirect method………………………………… 5
2.7 Operating cash flow for the British Assets Trust PLC…… 5-6
2.8 Interpretation of the company liquidity…………………… 7-9
(Basedon information in cash flow of British Assets Trusts PLC)
03. Creative accounting…………………………………………………… 10
3.1 definitions and explanation of creative accounting…………… 10
3.2 deference of creative accounting and economics pressure. …… 10
3.3 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 systemof accounting…………………………………… 13
05. Conclusion…………………………………………………………………… 14
06. Bibliography………………………………………………………………… 15
06. Appendix. …………………………………………………………………… 16-17

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.
2.5 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 PLC
Cash flow for the year ended 30th sep. 2014
Operations activities £(‘000)
Profit before taxation
Adjustment to reconcile to cash provided by operation
Financial cost
Gain on investment
Exchange difference
Changes in working capital
Increase in investment income
Other 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 systemof 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 LIQUIDITY

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