15: Cash Flows

Question 1

What is the difference between net cash flow and profit?

Answer 1

Net cash flow: all cash received by a company in a period less all cash paid out

Profit: the result of recording income and expenses in the period to which they relate, whether or not cash has been received or paid
- reached after charging non-cash expenses such as depreciation

Net cash flow and profit DO NOT equal!

Question 2

Is cash flow more important than profit?

Answer 2

It can be argued so - it is most important in terms of ascertaining the Going Concern status of a company.

The users of statements need to see that a business has generated positive cash flows during the year. IAS7 requires companies to produce a statements of cash flows

Question 3

What are the 7 benefits of cash flows?

Answer 3

1. Factual and objective - not influenced by accounting policies and accounting estimates
2. Easily understood by users who can see how cash is raised and spent
3. Provide extra information on business activities
4. Allow the users of the FSs to assess the future prospects of a business
5. Show how adaptable a company is to its circumstances
6. Show whether a company is in a position to pay amounts as they fall due
7. Facilitate comparison between companies by requiring the use of standard headings

Question 4

What are the three sections of a statement of cash flow?

Answer 4

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities

Question 5

What are cash flows from operating activities?

Answer 5

The principle revenue producing activities of the business, including day to day trading

(does not include cash GENERATED from operating activities)

Question 6

What are cash flows from investing activities?

Answer 6

The cash flows associated with the purchase and sale of non-current assets and income from investments held

Question 7

What are cash flows from financing activities?

Answer 7

The cash flows associated with the long-term financing of a company, ie. share capital and loan stock, as well as dividends paid

Question 8

What are cash and cash equivalents, in terms of cash flows?

Answer 8

Cash: cash in hand and deposits available on demand

Cash equivalents: liquid assets with a maturity date less than 3 months in the future

The change in cash and cash equivalents is calculated as the net of all cash flows identified in the cash flow statement (goes right at the bottom)

Question 9

Write out everything on the cash flow from operating activities

(Indirect method)

Answer 9

Profit before tax
Finance cost
(Investment/finance income)
Depreciation charge
Amorisation charge
Loss/ (profit) on disposal of non-current assets
(Increase) in inventories
(Increase) in trade receivables
(Decrease) in trade payables

Question 10

What are the two extra cash flows generated from operating activities?

Answer 10

Tax payable
Interest payable

Do these by reconciling the payables in the SFP with the expense in the P&L

If there is no opening or closing statement, the charge to profits is the cash outflow

Question 11

What goes in the cash flow from investing activities?

Answer 11

(Purchase of PPE and intangible assets)
Proceeds from the sale of PPE and assets
Interest received
Dividends received

Question 12

What goes in cash flow from financing activities?

Answer 12

• proceeds from issue of shares
• movement in borrowings
• (dividends paid)

Question 13

‘Intangible assets costing £251,340 were purchased during the year.

Assets with a carrying amount of £17,000 were sold for £24,000 during the year.’

Where are these figures going?

Answer 13

251,340 - purchase of intangible assets
24,000 - proceeds from sale of intangible assets
7,000 - gain loss on sale of intangible assets

Question 14

What are the five ways statements are regulated?

Answer 14

• Companies Act 2006. Sets form and content. Companies might abide by this.
• Accounting concepts. Ie. Reevaluating assets.
• Financial Reporting Standards. Clarify how to account for and present specific items. The Financial Reporting Council (FRC) sets UK standards, International Accounting Standards Board sets international standards.
• GAAP. The set of accounting principles applied in a given country.
• IAS1. The concept of fair presentation. Companies Act wants a true and fair view.

Question 15

What’s in the direct method for creating cash flows?

Answer 15

Cash sales
Cash received from credit customers

Less:
Cash purchases
Cash paid to credit suppliers
Cash expenses

Cash generated from operations

Question 16

What is a question looking for an ‘increase in cash of cash equivalents’ asking for?

Answer 16

Asking for an excerpt of cash flow

Could be taking sections from any of operating, investing or financing

Make sure to only add to the cash flows the relevant numbers - dont add ones not in the section being asked for!

If it mentions dep, always remember to add back in, as its a non-cash expense

Make sure finance income is always (negative)

A question with a starting profit figure given to you is also likely a cash flow question