5 - Statement of Cash Flows

Question 1

What is the indirect method?

Answer 1

Net profit or loss is adjusted to non cash items and working capital adjustments (More common than direct method). It is only the cash flows from operating activities that differs from each method

Question 2

What is the direct method?

Answer 2

Shows actual cash receipts and payments from customers and to suppliers (more difficult to prepare than indirect method as information not as readily available)

Question 3

What are investing activities?

Answer 3

Cash flows from the acquisition and disposal of non current assets and cash returns from investments (Dividends and interest)

Question 4

What are financing activities?

Answer 4

Cash flows which result in a change in the size and composition of the contributed equity (share capital) and borrowings of the entity

Question 5

What effect does an increase in trade payables/creditors have on the profit of a company on the working capital adjustments?

Answer 5

Increase in profit

Question 6

What effect does an increase in trade receivables/debtors have on the profit of a company on the working capital adjustments?

Answer 6

Decrease in profit

Question 7

What is a cash equivalent?

Answer 7

A short term, highly liquid investment which can be readily turned into known amount of cash.