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Cash Flow – The Life Line Of Business
Cash Flow from Operating Activities
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Similar to Chapter 8 and 9, we will be using TexCycle’s 2016 annual report for discussion on cash flow statement. For ease of understanding, we have broken down the cash flow statement into 3 tables, namely:

  1. Cash flow from operating activities;
  2. Cash flow from investing activities; and
  3. Cash flow from financing activities.


Cash Flow from Operating Activities
Cash flow from operating activities shows the cash movement, i.e. inflow and outflow, resulting from the operations of the business.

The calculation is derived by taking the net profit of the company and adjusted for non-cash items (such as depreciation and impairment of goodwill) that have been taken into consideration when calculating net profit.

This is because as mentioned earlier, accounting profit is based on accrual concept, and not cash concept. Thus, by eliminating the impact of non-cash items in the income statement, we would be able to derive the cash flow.

Table 1 shows the cash flow from operating activities.

Table 1: Statements of Operating Cash Flow for the Year Ended 31 December 2016 (in RM)
2015 2016
Profit for the year 7,373,632 15,176,682
Adjustments for:
Depreciation of property, plant & equipment 2,806,675 3,089,612
Tax expense recognised 737,988 1,339,922
Allowance for doubtful debts 582,613 952,684
Amortisation of prepaid lease payments 185,376 185,376
Bad debts written off 70,022
Property, plant & equipment written off 23,080 61,489
Finance costs 101,312 35,343
Changes in fair value of unit trusts (165,146) 30,415
Unrealised loss/(gain) on foreign exchange (27,857) 289
Gain arising from fair value of investment property (6,229,300)
Allowance for doubtful debts no longer required (447,536) (208,933)
Gain on investment in unit trusts (128,172) (175,958)
Provision for litigation costs no longer required (31,250)
Interest income (25,181) (48,889)
Gain arising from insurance claim on loss on property, plant and equipment (750) (8,300)
Gain on disposal of property, plant and equipment (125,000) (1,000)
Operating profit/(loss) before working capital changes 10,827,784 14,269,454
(to be continued)

This is the first part of the operating cash flow statement, which shows the cash generated from the buying and selling activities.

One can observe one very critical point about how the cash flow from operations is derived. The income and expense adjustments made to the net profit to derive cash flow from operations are similar to the calculation of core earnings discussed in Chapter 8: Income Statement – A Measurement of Profitability.

This is the reason why I always emphasise more on the cash flow statement compared with the income statement.

Finance cost is “added back” at this level as finance cost is not related to operating activities. As finance cost is related to borrowings, it will be re-stated in the cash flow from financing activities.

Likewise, interest income is “taken out” at this level as interest income is not related to operating activities, but investment. Thus, it will be captured in the cash flow from investing activities.

Let’s take a look at the table below, which is a continuation from table 1.

(continuing from table 1)
  2015 2016
Operating profit/(loss) before working capital changes 10,827,784 14,269,454
Decrease/(increase) in:
Inventories 23,451 49,765
Trade receivables (989,213) (3,983,506)
Other receivables and prepaid expenses 78,615 140,962
Increase/(decrease) in:
Trade payables 53,333 (77,741)
Other payables and accrued expenses (990,778) (109,717)
Cash generated from/(used in) operations 9,003,192 10,289,217
Tax refunded 539,205 665,242
Tax paid (2,185,108) (2,328,168)
Net cash from/(used in) operations 7,357,289 8,626,291

To get the cash flow from the business operations, we need to take into consideration the changes in working capital.

In the next posting, we will take a look at what is Working Capital, which is crucial to understand cash movement in a business.


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