# F1 4.05 Reconciliation of Cash and Cash Equivalents

The final section of the Statement of Cash Flows records the overall movement of cash and cash equivalents over the financial period. This is calculated by combining the net cash flows of the first three sections of the Statement. It then records the company’s Cash and Cash Equivalents at the start and end of the period as taken from the company’s Statement of Financial Position.

#### Net movement in cash and cash equivalents

The net movement in cash and cash equivalents included the final part of the Statement of Cash Flows is calculated by combining:

• The net cash flow from operating activities
• The net cash flow from investing activities
• The net cash flow from financing activities

If the net cash flow represents cash leaving the company, we will usually use the term “Net cash flow used by…” and if the net cash flow represents cash coming-in to the company, we will usually use the the term “Net cash flow generated by…”

If the calculation results in a positive number this means that the company’s holdings of cash and cash equivalents will have increased during the period by the net cash flow. If it is a negative number, the company’s cash and cash equivalents will have fallen.

Question
A company’s statement of cash flows records the following amounts:
Net cash flow used by operating activities of £7,256
Net cash flow generated from investing activities £108,681
Net cash flow used by financing activities £31,270
Calculate the net movement in cash and cash equivalent and identify whether the company’s cash and cash equivalents have increased or decreased over the year.

The net movement in cash and cash equivalents for the year should be:

-7,256 + 108,681 – 31,270 = 70,155

The company’s cash and cash equivalents will have increased by £70,155 over the year

#### Cash and Cash Equivalents over the financial period

The Cash and Cash Equivalents at the start and end of the period should be taken from the company’s Statement of Financial Position. In order to identify these you should review both the Current Assets and the Current Liabilities sections. You should add up the total of all cash and cash equivalents in the Current Assets section and then deduct any bank overdrafts recorded in Current Liabilities.

##### Example

If the net cash and cash equivalents is a liability (due to a bank overdraft) the net amount should be recorded as a negative figure in the Reconciliation.

Question
At the end of the year, a company has the following bank balances and investments:
i) A bank overdraft of £7,400
ii) Shares in a listed company worth £32,500 which the sold two weeks after the year-end
iii) A money-market bond worth £75,000 that is due to be repaid in 2 months
iv) A bank savings account of £41,600
What is the value of the company’s cash and cash equivalents at the year-end?

Cash and cash equivalents at the year end: £109,200

This is calculated as the company’s cash/bank balances (£32,500 – £7,400) plus its cash equivalents of £75,000 (the money market bond). The shares are not classed as cash equivalents.

#### Illustration

We shall complete our example.

The Net Movement in Cash and Cash Equivalents is £24,000; calculated as:

• Net cash from operating activities (i.e. £64,000)
• Less Net cash used in investing activities (i.e. £28,000)
• Less Net cash used in financing activities (i.e. £12,000)

The Cash and Cash Equivalents at the start of the year was £(16,000) and by the end of the year the company had a positive balance of £8,000. The completed statement is shown below.

If we look at the above reconciliation we can see that the net movement of £24,000 is the difference between the opening and closing cash and cash equivalents (i.e. the change from an overdraft of £16,000 to £8,000 in the bank).

Exam tip: If the net movement you have calculated does not explain the change in the cash and cash equivalents you should review the Statement for any obvious errors. If you cannot identify any errors quickly, you should move onto the next question and only return to the Statement of Cash Flows if you have time at the end of the exam.