Cash Flow Statement for Dubai Insurance Company - Case Study Example

Cash Flow Statement forms a vital part of all organization. “Cash flow statement reports the amount of cash inflow and outflow during a period of time usually an accounting year”. (Heakal, 2009) It helps to find out the change in cash position. Here we consider activities under three heads. They are investing, operating and financing. Here it is divided into three to find the change in cash flow from all areas. “Operating activities are the day to day activity and the change in cash flow from this activity is accounted for”. (Heakal, 2009) “Investing activity is the change in cash flow resulting from investment in long term investments”. (Heakal, 2009) “Financing activity is the change in cash flow due to change in the owners’ equity”. (Heakal, 2009) The company which I have chosen is Dubai Insurance Company. Now we have a look at the financial statement. The statement of Income for Dubai Insurance Company for the year 2008 is provided for Income Statement for 2008   2008 (AED) 2007(AED) Underwriting Income     Insurance Premium receivable 40,855,420 15,239,855 Movement in provision for unearned income -6,470,199 -3,690,632 Insurance Premium Revenue 34,385,221 11,549,223 Less: Reinsurance Share Premium -13,688,597 -5,559,432 Net insurance premium Revenue 20,696,624 5,989,791 Commission Income 3,585,987 1,856,088   24,282,611 7,845,879 UNDERWRITING EXPENSES     Claims 10,541,594 -646,753 Reinsurers Share of claim -3,631,171 1,940,677 Commission expense 8,119,137 1,280,110 Excess of loss reinsurance premium 177,875 147,188 General expenses 2,008,570 1,001,280   17,216,005 3,722,502 UNDERWRITING INCOME 7,066,606 4,123,377       Investment Income     Realized gain 2,325,435   Fair value gain & losses -416,962 2,343,525 Other Investment Income 2,554,242 5,549,435   4,462,715 7,892,960 Other Income & Expense     General expenses not allocated -657,002 -329,523 Other Expenses -37,799 -3,036   -694,801 -332,559       Profit for the period 10,834,520 11,683,778       Earnings per share 1.08 1.17 The Balance Sheet for the year 2008 for Dubai Insurance Company is as follows Balance Sheet for the year 2008   2008 (AED) 2007 (AED) Assets     Office Equipment and vehicle 549,364 501,847 Investment property 3,709,035 3,892,950 Advance from purchase of investment property 60,507,750 20,169,250 Financial asset- Investment     at fair value 5,105,978 6,992,122 held to maturity 1,849,505 1,849,505 available for sale 357,322,250 362,315,685 Reinsurance asset 30,446,995 20,256,479 insurance receivable 41,521,059 33,481,353 prepayments 1,673,308 1,268,126 statutory deposits 7,500,000 7,500,000 cash and equivalents 33,387,729 53,391,455       Total Assets 543,572,973 511,618,772 Equity & Liability     Equity & Liability     Share Capital 100,000,000 75,000,000 statutory reserve 37,500,000 37,500,000 general reserve 3,500,000 3,500,000 retained earning 65,526,165 54,691,645 proposed dividend   25,000,000 cumulative change in fair value of securities 247,663,349 252,291,888 Total Equity 454,189,514 447,983,533       Liabilities     Insurance Contract Liability 53,620,428 43,762,014 Amount held under reinsurance treaties 5,923,837 4,765,782 Reinsurance balance payable 15,363,592 4,424,507 Overdraft 4,003,608   Trade payable 10,471,994 10,682,936 Total Liabilities 89,383,459 63,635,239       Total equity and liabilities 543,572,973 511,618,772 The additional information provided is a. “Earnings per share is calculated by dividing the number of shares with average number of share” b. 10% of net profit needs to be transferred to statutory reserve. c. No transfer needs to be made to general reserve d. Primary segment information   2008 (AED) 2007 (AED) Insurance     Underwriting Income 24,282,611 7,845,879 Underwriting expense -17,216,005 -3,722,502 Net Underwriting income 7,066,606 4,123,377       Investment     Investment Income 4,462,715 7,892,960 Unallocated other income and expenses -694,801 -332,559       Profit for the period 10,834,520 11,638,778 e. Dividend income of AED 2,020,568 and AED 4,745,938 for 2008 and 2007 is seasonal f. Purchase of properties in 2008 AED 141,184,750 and 2007 is AED 181,523,250 g. The company has a contingent liability of AED 7,500,000 which will not change On the basis of this we prepare the cash flow statement in an indirect basis. For this first we need to look at investing activity Then we consider the first activity i.e. operating activity. Here “first we make adjustments for non cash items and then cash items”. (Arora, 2004) To know the actual flow of cash certain adjustments are to be made. Here, “we deduct all the transaction that does not change the cash inflow for the firm”. (Arora, 2004) These details are provided from the income statement. Then “we add all the transaction that does not represent cash outflow for the firm”. (Arora, 2004) The details for this are provided in the expense account. Here we are considering activities for which adjustments need to be made. The calculation are shown below 1. Depreciation on office equipment and vehicle Description Amount Description Amount To balance b/d 501,847 By depreciation 59,552 To Purchases 107,069 By balance c/d 549,364   608,916   608,916 2. Depreciation on investment property Description Amount Description Amount To balance b/d 3,892,950 By depreciation 183,915     By balance c/d 3,709,035   3,892,950   3,892,950 3. Gain on sale of securities Profit on sale of securities = 249,948,655 – 252,291,888 = 2,285,306 4. Provision for employee for service benefit is 161,886 Now we see the changes in operating asset along with liabilities 1. Financial asset at fair value = 6,992,122 – 5,105,978 = 1,886,144 2. Reinsurance asset = 20,256,479 – 30,446,995 = -10,190,516 3. Insurance receivable = 33,481,353 – 41,521,059 = - 8,039,706 4. Prepayment of accrued income = 1,268,126 – 1,673,308 = - 405,182 5. Insurance Contract liabilities = 43,762,014 – 53,620,428 = 9,858,414 6. Amount held under reinsurance treaties = 4,765,782 – 5,923,837 = 1,158,055 7. Reinsurance balance payable = 4,424,507 – 15,363,592 = 10,939,085 8. Trade and other payable = 10,682,936 – 10,471,994 = -149,994 9. Employee services paid = -222,834 So when we present the above calculation in a chart to represent the cash from operation we get the following   2008 (AED) Operating Activity   Profit for the period 10,834,520 Adjustments for:   depreciation on office equipment and vehicle 59,552 depreciation on investment property 183,915 provision for employee for service benefit 161,886 gain on sale of securities -2,285,306   8,954,567 Change in operating asset and liabilities   Financial asset at fair value through profit & loss 1,886,144 Reinsurance asset -10,190,516 Insurance receivable -8,039,706 Prepayment and accrued income -405,182 Insurance contract liabilities 9,858,414 Amount held under reinsurance treaties 1,158,055 Reinsurance balance payable 10,939,085 trade & other payable -149,994 Cash from operation 14,010,867 employee end of services paid -222,834 Net Cash from Operating Activities 13,788,033 Now we look in cash from investment activity. Here we “consider capital expenses which are not charged to the income statement but capitalized to balance sheet as it helps the firm to earn revenues in the future”. (Gill & Moira, 2001) The few items considered here are “purchase and sale of property like equipment, machinery, building and so on, purchase of stock and redemption of investments”. (Gill & Moira, 2001) The transactions which affect the investment decision are as follows 1. Purchase of office equipment and vehicle Description Amount Description Amount To balance b/d 501,847 By depreciation 59,552 To Purchases 107,069 By balance c/d 549,364   608,916   608,916 2. Advance on purchase of property Description Amount Description Amount To balance b/d 20,169,250     To advance on purchase 40,338,500 By balance c/d 60,507,750   60,507,750   60,507,750 3. Proceeds from sale of securities Profit on sale of security = 2,650,202 Now we calculate the earnings from investment activities. This has been shown below Investing Activities   Proceeds from sale of available for sale securities 2,650,202 Advance on purchase of property -40,338,500 Purchase of office equipment and vehicle -107,069 Net cash used in investing activity -37,795,367 We get a negative cash flow from this activity. This might be due to the fact that the company is on an investment spree. Now, we look at the financing activity. Since no change is made so there is no change in this activity. Now we add all the change from these activities. It is as follows Net Cash from Operating Activities 13,788,033 Net cash used in investing activity -37,795,367 (decrease) Increase in cash equivalent -24,007,334 It gives a negative change in cash. In this we add the opening cash balance. It gives the following (decrease) Increase in cash equivalent -24,007,334 Opening cash balance 53,391,455 Cash and equivalent on 31 March 29,384,121 Thus we get the cash flow statement using indirect method. It thus helps to check the accuracy of the system. It thus helps to show “changes in working capital during the year, how the money generated was used, and also helps to access the timing and predictability of cash flows”. (Linda, 2007) This statement has become vital. Every company presents it. Every company has this statement in their financial statement. Since, 1987 it has been made mandatory. This has increased its use. So, cash flow statement forms a very important statement. It helps to judge the overall efficiency. This statement since its usage has helped to come with important decision. Thus to put in the overall cash flow statement summarizes as follows (Garewal, 2003) It is a very important tool and is helping investors, suppliers, and also the company to take some vital decision which can alter the course of the business. Reference Arora R K, “accountancy”, 2nd edition, Oxford University Press, India, 2004 Garewal T, Financial analysis, Preparation of financial statement, Chapter 6, page 45-54, Module 1, 2003 Gill &Moira, “Financial Analysis Revisited”, fifty minutes series book, Axzo Press, 2001 Heakal R, “what is cash flow statement”, Investopedia, A Forbes Media Company, 2009 Read More