Cash Flow Statements Flashcards
(11 cards)
Assess to what extent a cash flow statement would be of benefit to potential shareholders in deciding whether or not to invest in x plc/ltd
Cash flow statements allow shareholders to see why profits differ from the cash position of the business by identifying the cash flows into the business and also the cash outflows and more importantly how cash flows have been used
A cash flow statement allows shareholders to see if the business is generating sufficient cash to pay taxes and dividends. In this case, cash flows cover these appropriations around x times. It shows to what extent cash flows are internally and externally generated.
Cash flow statements must be read in conjunction with income statements and balance sheets since each statement only shows one aspect of the businesses’ activities. Current cash flow statements must be compared with previous ones to allow trends to be determined
Explain two limitations of published financial statements for potential shareholders in x plc/ltd
Published financial statements are in summary form and therefore don’t necessarily provide enough detailed relevant information to assist with decision making such as whether to buy or sell shares
Some aspects of the financial statements are subjective including the measurement of profit and this could hinder comparisons being made between different investment opportunities.
The financial statements are historic and don’t necessarily reflect the current performance levels. This makes them more difficult to use for predicting the future including an ability to pay dividends and the impact on share prices, external factors such as current economic climate, e.g. inflation
Explain two reasons why the statement of cash flows would be useful to a debenture holder of x plc/ltd
To find out if any loans have either been advanced and repaid
Mention gearing
Debenture holders would be able to assess how their loans are being used in the business
A debenture holder would also be interested in determining the ability of the company to repay their loan in the future
Discuss the benefits that a shareholders in x plc/ltd might gain from the publication of the statement of cash flows
The statement of cash flows enables shareholders to assess the performance of the business bc it focuses on cash where it comes from and on what it has been spent which is essential for short-term survival of business and could affect the company’s ability to pay dividends
It provides shareholders with information not shown in the income statement /balance sheet for example such as cash generated from operations
It enables shareholders to distinguish between internally and externally generated finance
Explain how it’s possible for a business to make a profit but have a decease in cash resources
Profit is measured on an accruals basis and cash is measured where it is actually received or paid
Some transactions affect profit (income statement) but not cash (give examples)
Some transactions affect cash but not profit (income statement) (give examples)
Some transactions affect both cash and profit but at different times
Assess the performance of x plc based on the statement of cash flows for the business. Identify the key changes in the liquidity of the company and discuss the implications of these changes for the company.
Intro:
- explain purpose of answer
- define cash flow statement and liquidity
- outline aspects you’ll evaluate
Analysis of cash flow statement:
Operating activities:
- assess cash flow
- identify trends
- consider efficiency in managing working capital
Investing activities:
- analyse major investors
- is spending growth-focused or excessive? Is it impacting liquidity?
- identify large outflows or inflows
Financing activities:
- evaluate changes in loans, dividends, share issue
- is org raising capital responsibly of taking on excessive debt
- has liquidity improved or worsened
Identification of key liquidity changes:
- uses ratios if available
- identify whether liquidity has strengthen or weakened
- what are the causes
Discuss implications for the business:
- consider impact of liquidity changes in financial stability
-discuss how cash flow affects investment opp, debt repayment & shareholder confidence
Conclusion:
- Summarise
- Provide clear recommendations
- Suggest strategies for improvement
What are the 3 sections of a cash flow statement and explain their purpose
Operating activities:
the main revenue producing activities together with payment of interest and tax
Investing activities:
the acquisition and disposal of long term assets and other investments
Financing activities:
receipts from issue of new shares, payments to repay shares, changes in long term borrowings and dividends paid
What goes in the operating activities section of a cash flow statement
Profit from operations (net profit before deductions of tax and interest
ADD Depreciation expense for the year
ADD Loss on sale of NCA (deduct a profit)
ADD Decrease in inventory (or deduct increase)
ADD Decrease in trade receivables (or deduct increase)
ADD Increase in trade payables (or deduct decrease)
Equals cash from operating activities
LESS Interest paid
LESS Tax paid
Equals net cash from operating activities
What goes in the investing activities section of a cash flow statement
LESS Purchase of NCA
ADD Proceeds from NCA
ADD Interest received
ADD Dividends received
Equals net cash used in investing activities
What goes in the financing activities section of a cash flow statement
ADD Proceeds of share issue
ADD New bank loans
LESS Bank loans repaid
LESS Dividends paid
Equals net cash from financing activities
What goes at the bottom of a cash flow statement
- Net increase/(decrease) in cash and cash equivalents
- Cash and cash equivalents at start of the year
- Cash and cash equivalents at end of the year
