Cash Flow

Question 1

Describe importance of cash flow

Answer 1

 Business stakeholders rely that the business has sufficient cash
 Businesses fail as a result of inability to find sufficient cash to settle their responsibilities

 Balance sheet and income statement show movements in wealth and the net increase or decrease in wealth for the period concerned

Question 2

Describe the statement of cash flows

Answer 2

shows cash inflows and outflows of the business over a period of time

• Cash receipts
• cash payments
• Net cash flow = Cash inflow - cash outflow

Question 3

What are three components of the cash flow statement?

Answer 3

1. Operating activites
2. Investing activities
3. Financing Activities

Question 4

what is cash in the statement of cash flows?

Answer 4

Cash: Cash on hand, demand deposits

Cash Equivalents

• Highly liquid investments
  
  • readily convertible to cash at the investor’s option
  • Used by entity in its cash anagement function on a day to day basis
  • Eg. bank bills, non-bank bills, money market deposits
• Bank overdraft

Question 5

Describe cash flow from operating activities

Answer 5

Net inflow from operations eg. purchase of inventory, payment of wages

Question 6

Describe cash flows from investing activities

Answer 6

Cash payments to acquire additional non-current assets and and other investments not
included in cash equivalents

cash receipts from the disposal of such assets through proceeds from sale

Question 7

Examples of cash outflow from investing activities

Answer 7

• to purchase property, plant and equipment, and other long-term assets
• to purchase long or short-term marketable securities
• to make loans

Question 8

Examples of cash inflow from investing activities

Answer 8

Inflows
 from sale of property,
plant & equipment,and
other long-term assets (sale proceeds from disposal of non-current asset)
 from sale of long and
short-term securities (shares or other investments)
 from collection of loans

Question 9

describe cash flow from financing activities

Answer 9

deals with financing the business. This excludes short-term credit such as trade credit

Question 10

Examples of Cash outflow from financing activities

Answer 10

• share repurchases
• debt repayment
• payment of dividends

Question 11

What are two approaches to cash flow from operating activities?

Answer 11

 Direct method: major classes of gross cash receipts
and gross cash payments are disclosed. Encouraged
in Australia.

 Indirect method: starts with net profit and then
eliminates non-cash items:
Net profit
+/- Adjustments for non-cash items
Net cash inflow (outflow) from operating activities

Question 12

for non-cash transactions, most relate to?

Answer 12

Most relate to operating activities and are linked to the difference between cash-based and accrual-based transactions.

• Income earned differs from the cash received: receivables (credit sales)
• Expenses incurred differ from the cash paid: e.g., depreciation or impairment, doubtful debts, accruals, prepayments, payables
• Gains/losses on disposal of non-current assets, revaluations, etc.

Question 13

cash flows from operating activities

(the direct method)

Answer 13

Reports the net of:

1. receipts from customers
2. payments to suppliers
3. payments for expenses

Question 14

cash flow from operating activites

direct method

• Cash receipts from customers
• Cash payments to suppliers
• Cash paid for expenses

Answer 14

Opening inventory

+ purchases

= goods available for sales

• closing inventory

= cost of goods sold

Opening accounts payable

+ purchases

= amount expected to pay for the period

– closing accounts payable

=cash paid to suppliers

Question 15

cash flow from operating activites

direct method

• Cash receipts from customers
• Cash payments to suppliers
• Cash paid for expenses
  
  • Calculation of paid paid relation to expense prepayments i.e prepaid expenses (asset accounts)

Answer 15

Beginning prepayments (balance sheet) + expense paid (cash paid for prepayments) in the period – expense recognised for the period (found in income statement) = ending prepayments

Closing balance of prepaid expense x
+ expense recognised for the period x
= amount expected to pay for the period x
− opening balance of prepaid expense (x)
= expenses paid x

Question 16

cash flow from operating activites

direct method

• Cash receipts from customers
• Cash payments to suppliers
• Cash paid for expenses
  
  • Calculation of paid paid relation to expense payable/ accruals

Answer 16

The calculation of cash paid relating to expense
payable/accruals (liabilities accounts):

Opening expense payables/accruals X
+ expense recognised for the period X
= the amount expected to pay for the period X
- closing expense payables/accruals (X)
= expenses paid X

Question 17

cash flow from operating activites

direct method

• Cash receipts from customers
• Cash payments to suppliers
• Cash paid for expenses

Answer 17

opening accounts receivable

+ sales

= Amount expected to receive for the period

– closing accounts receivable

= cash received from customers

Question 18

what are the four expenses on the income statement of the company?

Answer 18

depreciation, interest expense, income tax
expense, other expenses

• depreciation expense does not present an outflow

“interest expense” and “other expenses” must have been paid in cash in the period because they are the expenses of the year and there are no prepayments or accruals related to these expenses at either beginning or end of the year. So the
cash paid for theses expenses equals the amount of these expenses

Question 19

convert other expenses to cash outflow

• converting tax expense (relating to expense payable)

Answer 19

Opening income tax payable (from balance sheet)
+ income tax expense (from income statement)
= **amount expected to pay for the period **
− closing income tax payable (from balance sheet)
= **income tax paid **

Question 20

what does cash flow from operating activities look like?

Answer 20

Cash receipts from customers 95
Cash paid to suppliers (63)
Interest paid (3)
Income taxes paid (2010 liability) (4)
Cash paid for other expenses (17)
Net cash provided by operating activities 8

Question 21

what does cash flow from investing activities look like?

Answer 21

Purchase of land and equipment
(20)
Proceeds from sale of land and
equipment
0
Net cash used in investing activities (20)

Question 22

calculating cash flow from financing activities

how do you calculate cash payment of dividends?

Answer 22

Opening balance of dividend payable 15
+ dividend declared for the period 20
= amount expected to pay for the period 35
− closing balance of dividend payable (20)
= dividends paid 15

Question 23

what does cash flow from financing activities look like?

Answer 23

Proceeds from issue of share capital 15
Proceeds of long-term borrowings 5
Repayment of long-term borrowings (0)
Dividends paid (15)
Net cash provided by financing activities 5

Question 24

what limitiations do cash flow statements have?

Answer 24

Much of the detailed information is disclosed in
the notes, and therefore careful review of the
notesis needed.
 Cash flows can be manipulated.
 Cash flow information is past information and
makes no predictions of the future.

Question 25

what will be at the beginning and end of statement of cash flows?

Answer 25

Cash and cash equivalents at the beginning of the period

Effect of exchange rate fluctuations on cash held

Cash and cash equivalents at the end of the period

Question 26

How do changes in current assets affect cash flow?

Answer 26

Increase in current assets reduce cash flow (increase in credit sales, cash used to purchase inventory and make prepayments) vice versa

Question 27

What do changes in current liabilities affect cash flow?

Answer 27

Increase in current liabilities increase cash flow (bank overdraft, accounts payable, accruals) as less cash has been paid out. vice versa