20 - Statement of cash flows Flashcards
what is cash used for
pay suppliers and employees
pay dividends to shareholders
repay debt to lenders
purchase property, plant, equipment and inventories to enable continuous production
what is cash
cash comprises of cash on hand and demand deposits, less any bank overdrafts
what are cash equivalents
cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value
what are cash flows identified from
the statement of cash flows identifies cash flows from three types of activity;
- operating activities
- investing activities
- financing activities
how do operating activities interact with cash
KEY part of statement - shows whether business has generated cash from operations
cash flows consist of:
- cash received from customers
- cash paid to suppliers for goods/services
- cash paid to and on behalf of employees
- cash paid in respect of interest and tax
net cash flow = profit before tax, adjusted for non cash items, less tax paid
what are investment activities and how do they interact with cash
eg investment in property, plant and equipment = net cash outflow to acquire new non current assets
also, some older capital may be disposed of in return for cash inflows
what are financing activities and how do they interact with cash
EQUITY and LOAN financing
if business issues shares for cash or borrows money from a bank = cash inflow
cash enables business to survive long term and fund investment
if business repays bank loan = cash outflow
what are the methods for reporting cash flows from operating activities
INDIRECT = profit before tax is adjusted for the effects of any non cash items and movement in working capital
DIRECT = major classes of gross cash flows, ie gross cash receipts and gross cash payments are disclosed
(only indirect method is examinable)
what is working capital movement
differences in working capital represent the differences between sales and cash received, and purchases and cash paid
when preparing cash flows from operating activities, profit before tax is adjusted for working capital movement (diff between opening and closing amounts)
where does interest appear
the amount of interest is shown in statement of profit or loss and referred to as ‘finance costs’
interest paid may be calculated or transferred to the proforma
how do profit and depreciation interact and appear
DEPRECIATION is a non cash expense which must be added back to profit before tax
profit before tax must be adjusted for any profit or loss arising on sale of property, plant and equipment, as this is also a non cash item
what are examples of financing cash flows
- cash proceeds or repayments of bank loans
- cash proceeds from issuing shares
- dividends paid to shareholders
