11 Statement of Cash Flows Flashcards
What is bank overdraft?
Short-term borrowing facility that allows you to withdraw more money from your bank account than you currently have
3 major categories in cash flow statement
Operating activities
Investing activities
Financing activities
Operating cash flow (OCF) formula - impt indicator of liquidity
*Rmb, not in formula list
OCF = Cash flow from operations / current liabilities
Higher better
Relationship to balance sheet
Operating cash flows:
Investing cash flows:
Financing cash flows:
Operating cash flows: current assets, current liabilities
Investing cash flows: non-current assets
Financing cash flows: non-current liabilities, owner’s equity
Cash flows from Operating Activities:
Indirect method
Direct method
Diff lies in cash flows from Operating activities (Investing & Financing remain the same)
Indirect method
P/L adjusted for effects of non-cash nature
When asset decrease - selling - cash inflow - ADD change
When liability decrease - repaying - lesser money - SUBTRACT change
DECREASE in inventory balance suggests that COGS is (smaller/greater) than purchases of inventory
GREATER
Quality of income ratio formula
*rmb, not in formula sheet
QOI = Cash flow from operating activities / Net Income
Portion of net income generated in cash
Higher better - able to meet operating and other cash needs for operations
2 ratios to asses liquidity
Current ratio
Quick ratio
Current ratio = Current assets / Current liabilities
Quick ratio = (Current assets - inventory - prepayments) / Current liabilities
- Pay ST obligations but with entity’s most liquid assets
Cash flow ratio formula
Operation cash flow ratio formula
*rmb, not in formula sheet
Cash flow ratio = cash / current liabilities
Operation cash flow ratio = operating cash flows / current liabilities
Cash conversion cycle formula
*rmb, not in formula sheet
Inventory holding period + receivable collection period - payable outstanding period
Shorter better
