ACCT1110 Chap.9 Cash Flow, Sustainability and Ethics
Cash Flow, Sustainability and Ethics
Once the cash flow statement exists, four measures turn it into judgement. Each divides the operating cash figure by something the business has to service, whether that is sales, current liabilities or capital expenditure, and together they ask whether the trading is producing enough money.
That is a different question from whether the trading is profitable, and a lender usually cares about it first.
One derivation has to happen before three of the four can be computed.
Where a question gives only the opening and closing carrying amounts of property, plant and equipment and the depreciation charged, capital expenditure is the missing figure in that account: closing carrying amount less opening carrying amount plus depreciation. The derivation holds only where there were no disposals, and questions that rely on it say so.
The second half of this topic steps outside the four statements.
A large listed company now publishes a sustainability statement alongside them, setting out quantified commitments with a baseline and a date, explaining which topics it judged material and why, and stating who checked the result.
Those disclosures follow different rules and often a different level of assurance from the financial statements, which leads directly to the ethical question the course closes on: every estimate you have met in this subject is also a lever, and the difference between an estimate and a manipulation is whether the facts moved first.
What this chapter covers
- 01
Four measures built on operating cash
- 02
Deriving capital expenditure from the asset account
- 03
What free cash flow is genuinely available for
- 04
Stating the unit with the number
- 05
Quantified targets, baselines and scope
- 06
Double materiality in two questions
- 07
Reported, required and assured
- 08
Estimates as levers, and the test that separates them
Three requests in one meeting, decided on a single test
- +1State the test before considering any request: does the change reflect the underlying facts, or only the desired result. Everything else follows from it.
- +1The useful life may be revised where the expectation has genuinely changed, for example after a refurbishment supported by an engineering assessment. A profit gap is not evidence, and a legitimate revision applies from now on and is disclosed.
- +1The doubtful debts percentage reflects collection experience. Nothing about that experience has changed, so cutting it would raise profit and overstate receivables at once. The words for this year only are themselves the warning, because a genuine change of estimate is not temporary.
- +1Holding the ledger open is not an estimate at all. It records January income in December and misstates the period in which the income was earned, which breaks the recognition rule the whole course rests on.
Key terms
- Free cash flow
- Operating cash flow less capital expenditure, the amount left once the business has paid to keep its existing capacity intact.
- Capital expenditure
- Cash spent acquiring or replacing long lived assets. Where it is not given, it is derived from the movement in the asset account plus the depreciation charged.
- Cash return on sales
- Operating cash flow divided by net sales, showing how much of each sales dollar actually arrived as cash.
- Current cash debt coverage
- Operating cash flow divided by average current liabilities. A figure below one means a year of trading does not cover the short term obligations.
- Sustainability statement
- The section of an annual report covering environmental and social performance, prepared under frameworks separate from the accounting standards.
- Double materiality
- Assessing a topic both for its effect on the entity's own value and for the entity's effect on people and the environment.
- Assurance
- Independent examination of reported information. Its scope and depth vary, so a published figure is not automatically a checked figure.
- Change of estimate
- A revision applied from the current period forward when expectations genuinely change, disclosed rather than applied quietly.
Cash Flow, Sustainability and Ethics FAQ
How is capital expenditure derived when it is not given?
From the movement in property, plant and equipment. Take the closing carrying amount, subtract the opening carrying amount and add back the depreciation charged for the year. A fleet moving from $184,200 to $198,940 with $22,000 of depreciation absorbed $36,740 of spending. The derivation assumes no disposals during the year, and questions relying on it state that.
Why do these measures use cash rather than profit?
Because obligations are settled in cash. A supplier cannot be paid in reported profit, and a loan covenant is tested against money that exists. Profit measures performance under the accrual rules; these four measures ask whether the trading is generating enough money to service what the business owes and to replace what it wears out.
What does double materiality add to a sustainability report?
A second question. Financial materiality asks whether a topic could affect the entity's own value, such as a carbon price raising production costs. Impact materiality asks whether the entity's activities affect people or the environment whether or not that rebounds on the accounts. Reporting against both is why these statements cover topics the financial statements never would.
Where does a legitimate estimate become manipulation?
At the point where the facts stop driving the number. Revising a useful life after a refurbishment that genuinely extends it is an accounting judgement supported by evidence. Revising it because profit is short is not, and neither is any change described as applying for this year only. The practical protection is documenting the basis of an estimate when it is made, not afterwards.
Exam move
Compute the four measures from one cash flow statement and write the unit beside each: a percentage, two multiples and a dollar amount.
Mixing the units is a common way to lose a mark that the arithmetic already earned, and past paper solutions print the unit every time.
For the written half of the topic, prepare two short answers you could give from memory: what double materiality adds to a report, and why a sustainability metric and a profit figure in the same document do not carry the same weight of external checking.
Then rehearse the ethics test in one sentence, because a question here is marked on whether you can separate a supported revision from a selected one.
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