8 - The Statement of Cash Flows Flashcards
What is the point of a Statement of Cash Flows
Reports the inflows and outflows of cash (and cash equivalents) under headings: operating, investing and financing activities.
Why is the statement of cash flows required to be produced?
Because neither the statement of financial position or statement of financial performance do not concentrate sufficiently on liquidity (cash flows).
What are cash equivalents?
Represent short-term, highly liquid investments that can readily be converted to a fixed amount of cash
Define cash-based accounting
Revenue that is recognised when cash is received and expenses are recognised when cash is paid/
Define accrual accounting
Revenue is recognised when it is earned and expenses are recognised when they are incuured.
What are the 3 components of the cash flow statement?
- Operating Activities
- Investing Activities
- Financing Activities
What is classified as an operating activity?
Your everyday transactions; stuff that is a part of day to day operations.
Represents net inflows from operations, and only cash received and paid, not expenses and revenue, are featured.
What is classified as an investing activity?
Concerned with cash payments to acquire additional non-current assets, and cash receipts for disposal of such assets
What is classified as a financing activity?
Deals with financing the business excluding short-term credit.
Classify: cash received from issue of capital share
Financing
Classify: cash received from customers
Operating
Classify: purchases of property, plant and equipmrnt
Investing
Classify: cash paid to suppliers
Operating
Classify: cash paid for dividends to shareholders
Financing
Classify: repayment of loan interest
Investing/financing
Classify: cash paid to employees
Operating
Classify: cash borrowed from the bank
Financing
Classify: cash proceeds received from sale of investment in another company
Investing
Classify: income taxes paid
Operating
Classify: repayment of loan principle
Financing
Classify: dividend paid
Financing
How to summarise the net cash of each activity if it is a positive number?
‘Provided by’
How to summarise the net cash of each activity if it is a negative number?
‘Used in’
What are the 2 methods of calculating and reporting the cash flows from operation section of the cash flow statement?
Direct and indirect method
What does the Statement of Cash Flows tell us?
Tells us how the business has generated cash during the period and where the cash has gone.
Tracks sources and uses of cash over time, which is indicative of trends and useful for predicting future opportunities and patterns of cash flow.
Identifies non-operational cash flows
Benefits of Cash Flow Statement
It explains what causes the movement in cash balance and other items impact by the cash flows.
It helps to measure cash sufficiency and business solvency .
It helps users to evaluation the entity’s ability to generate future cash flows.
