Cash Flow Statement

Question 1

Why is cash important

Answer 1

Cash is needed to pay:

Employees
Suppliers
Other creditors e.g. tax

Question 2

Cash is not the same as profit

Answer 2

3 things that affect cash flow but not the profit and loss account
1- paying cash to creditors
2-purchase of fixed assets (machinery)
3- taking out / paying a loan/debenture

Name three transactions that affect the profit and loss but not cash flow

1-Depreciation
2-Purchase of inventory
3-Accrual of expenses

Question 3

What is cash

Answer 3

Cash - notes and coins in hand and deposits in banks and similar instruimos that are accesible on demand

Question 4

Cash flow statements

Answer 4

Lists cash flow over a period of time

Explains how cash and cash equivalents figure in the balance sheet has changed from one year to another

Historical document not cash budget for future

Question 5

Can a profitable business run out of cash

Answer 5

A business might report healthy profit and yet suffer severe cash flow problems due to :

• The purchase of non current assets
• Building up large inventories
• The repayment of loans
• Payment of high dividends

Question 6

Layout

Answer 6

Cash from operating activities 
\+
Cash from investing activities 
\+
Cash from financing activities 
\+
Cash at start of the year 
=
Cash at the end of the year

Question 7

Part 1) Cash from operating activities

Answer 7

Start with the profit from operating activities before tax and adjust for

1) items in the profit and loss account not involving the movement of cash
- add dep for the year
- add back losses from sale of non current assets
- subtract profits from sale of non current assets

2) changes in inventory,TR and TP(comparing opening and closing balance sheets)
- subtract (add) an increase (decrease) in closing inventories
- subtract (add) and increase (decrease ) in TR
- add (subtract) an increase (decrease ) in TP

3) add back interest expense and subtract interest and tax paid (watch out for accruals)

Question 8

Part 2) cash from investing activities

Answer 8

Shows cash flows from making new investments and disposing of existing ones

• Cash payments to buy non current assets
• Cash receipts on disposal of non current assets
• Cash receipts from investments outside the company :
• Interest received on loans
• Dividends received

Question 9

Part 3: cash from financing activities

Answer 9

Cash flows that change the equity or long term borrowing

• Share issues and redemptions
• Changes in long term borrowing (issue or redemption of debentures)
• Dividends paid

Question 10

Tax and interest

Answer 10

We want the amounts paid which is not necessarily the same as the expenses in the profit and loss account

E.g. 2017. 2016
Tax expense 80,000
Tax creditor 86,000. 90,000

Amount paid = 90,000+80,000-86,000= 84,000

Question 11

Exam technique

Answer 11

Proforma - enter main headings and leave lots of space to fill in detail

Enter easy items - e.g. change in inventory, TR, TP

Tick off items as you enter them from the question

Calculate items that need workings e.g. disposal of fixed assets and deprecation

Question 12

Extra (issue shares and revaluation …..)

Answer 12

Issue of bond shares does not involve cash flow

Revaluation of non current asset does not involve cash flow

We use indirect method of preparing a cash flow statement

Question 13

Advantages of cash flow statements

Answer 13

1) shows the business’ ability to generate cash from trading activities
2) creditors are more interested in the ability to pay than in profit-going concern
3) easier to understand for a non accounting person than profit and loss account as no accounting conventions
4) shows significant components of cash flows e.g. how finance is raised and spent

One disadvantage is that it ignores the accruals concept so cash flows could relate to previous or following years