Cash Flow Statements

Question 1

Distinguish between a cash gain and a non cash gain

Answer 1

Cash gain - increases profit and cash e.g. investment income, discount received

Non cash gain - increases profit but not cash e.g. profit on sale of fixed assets, reduction in provision for bad debts

Question 2

What is the purpose of cash flow statements?

Answer 2

• show cash inflows and outflows for the years
• help predict future cash flows
• to aid financial planning
• provides information for assessing liquidity
• assists in loan applications

Question 3

What are non-cash expenses?

Answer 3

Items that reduce profit not cash

→ depreciation, provision for bad debts, sale of fixed asset

Question 4

What are cash expenses?

Answer 4

Items that reduce both profit and cash

→ wages, insurance

Question 5

Why does profit not always equal cash?

Answer 5

• credit purchases / sales affect p not c
• depreciation reduces p not c

• purchase / sale of FA affects c not p
• change in stock / debtors / creditors affects c not p

Question 6

What are non-cash gains?

Answer 6

Gains which increase profit not cash

→ profit on sale of fixed asset, reduction in provision for bad debts, patent write off

Question 7

What are cash gains?

Answer 7

Gain which increases both profits and cash

→ investment income, rental income, discount received

Question 8

Cash flow requirements set out by accounting standards board

Answer 8

Requires large companies to prepare a cash flow statement for each activity period
Requires that individual cash flows should be entered under standard headings (ORTCEMF)

Question 9

Explain what is meant by ‘overtrading’

How does a cash flow statement show that a firm may be overtrading?

Answer 9

Overtrading is when a firm is carrying on a level of trade which is too great for the amount of working capital in the business
↳ negative net current assets or working capital figure

If a firm had operating profits but a net cash outflow from operating activities

Question 10

What is a financial reporting standard?

Answer 10

A standard is prepared by the regulatory authorities. It is best practice in accounting which allows accounts to be compared from year to year and from company to company

Question 11

What information about a firm’s financial position is highlighted to its management by a cash flow statement

Answer 11

• overtrading
• change in cash
• why profit doesn’t = cash