Cash flow statement?

Question 1

What is the cash flow statement, what is it’s basis and what does this imply?

Answer 1

• Shows the sources and uses of cash for a period
• Measures flows of wealth over time
• Based on cash accounting, not accrual
• Therefore net profit does not have to equal net cash flow from operating activites

Question 2

Why is the cash flow statement important?

Answer 2

• Cash is important because creditors and owners will not normally accept any other form of settlement
• The balance sheet and income statement show movements in wealth but do not concentrate sufficiently on liquidity

Question 3

What kinds of cash are there?

Answer 3

• Cash

* Cash equivalents

Question 4

What are cash equivalents?

Answer 4

• Highly liquid investments
  
  • Treasury bills
  • Money market deposits
• Bank overdrafts

Question 5

What is special about the gains from the disposal of non current assets?

Answer 5

Difference between cash received and book value (gains/loss) do not represent cash flows

Question 6

What kind of investing/financing activities would not involve cash?

Answer 6

• direct exchanges such as shares for assets
• non current assets for reduction in debt
• bonus issues of shares from reserves

Question 7

How is the cash flow statement composed?

Answer 7

• Cash flows from operating activities
• Cash flow from investing activities
• Cash flow from financing activities

Question 8

What are cash flows from operating activities and what are they normally?

Answer 8

• Net flow from operations

- Normally positive

Question 9

What are cash flows from investing activities and what are they normally?

Answer 9

• Net flow made to acquire long-term assets and other investments not included in cash equivalents, and cash receipts from the disposal of such assets
• Normally negative

Question 10

What are cash flows from financing activities and what are they normally?

Answer 10

• Net flow from financing the business excluding short term credit
• +/- depends on financing strategy

Question 11

What are the inflows in cash flows from operating activities?

Answer 11

• From sales of goods and services to customers (cash receipts from customers)
• From receipt of interest on loans or dividends on investments in stock

Question 12

What are the outflows in cash flows from operating activities?

Answer 12

• Employees wages
• Suppliers for inventory
• Other expenses
• Creditors for interest
• Government for taxes

Question 13

What are the inflows in cash flows from investing activities?

Answer 13

• Sale of property, plant & equipment & other long term assets
• Sale of long and short term securities
• Collection of loans

Question 14

What are the outflows in cash flows from investing activities?

Answer 14

• Purchases of property, plant & equipment, and other long term assets
• Purchases of long or short term marketable securities
• To make loans

Question 15

What are the inflows in cash flows from financing activities?

Answer 15

• From issue of shares

- For issue of debt

Question 16

What are the outflows in cash flows from financing activities?

Answer 16

• Buy back of shares
• Repayment of debt
• Payment of dividends

Question 17

How are cash receipts from customers calculated?

Answer 17

• Opening accounts receivable + sales - closing accounts receivable

Question 18

How are cash payments to suppliers calculated?

Answer 18

• Opening accounts payable + purchases - closing accounts payable
  
  • Purchases = closing inventory + COGS - opening inventory

Question 19

How are cash payments relating to expense payable/accruals (liabilities) calculated?

Answer 19

Opening expense payables/accrual + expense recognised for the period - closing expense payable/accruals

Question 20

How are cash payments relating to prepayments (assets) calculated?

Answer 20

Closing balance of prepaid expense + expense recognised for the period - opening balance of prepaid expense

Question 21

How can dividends paid be calculated?

Answer 21

• Opening balance retained earnings + net profit - closing balance retained earnings
• Opening balance of dividend payable + dividend declared - closing balance of dividend payable

Question 22

How can proceeds/repayment of long term borrowing be calculated?

Answer 22

Increase/decrease in applicable liability

Question 23

What are the limitations of the cash flow statement?

Answer 23

• Careful review of the notes is needed
• Cash flows can be manipulated
• Cash flow information is past information and makes no predictions of the future