Cash Flow Statements

Question 1

Explain solvency

Answer 1

The ability of a company to pay all it’s debts as they fall due for payment (long term) A firm is solvent if total assets are greater than total external liabilities

Question 2

What is a financial reporting standard?

Answer 2

A rule that must be applied to all financial statements in order to give a true, fair view of company’s financial position. Sets out best practice in accounting that allows accounts to be compared from year to year and from company to company

Question 3

What are the implications of reduced gearing for business

Answer 3

Low interest repayments increase amount of profit available for investment elsewhere in business
Shareholders likely to get dividend with low gearing
Business has greater financial stability -less affected by rises in interest rates
Easier to raise additional loan finance

Question 4

Give five purposes of cash flow statements

Answer 4

To show that profits do not always equal cash
Show cash inflows and outflows during the past year
To help predict future cash flows
To help financial planning
To provides information to assess liquidity/solvency

Question 5

Give four obligations of a large public company under the companies act

Answer 5

Provide a full set of accounts, balance sheet and cash flow statement to shareholders at AGM
File a full set of accounts and balance sheet with registrar of companies
Provide explanatory notes to these accounts
Must have it’s accounts audited

Question 6

Outline the responsibility of directors of a company

Answer 6

To comply with the companies acts
To keep proper accounting records enabling financial statements to be prepared
Prepare annual financial statements
Sign financial statements
Select suitable accounting policies

Question 7

What is a cash expense vs a non cash expense

Answer 7

Cash expense reduces both profit and cash ex: wages

Non cash reduces profit and not cash ex: depreciation, provision for bad debts

Question 8

Explain why earning profit does not always result in a corresponding increase in cash balances

Answer 8

Credit sales/purchases affect profit not cash
Non- cash losses/gains affect profit not cash
Purchase/sale of fixed assets by cash affect cash not profit
Intro or withdrawal of capital in cash affect cash not profit

Question 9

What is the Accounting standards board- influence on cash flow statements

Answer 9

Accounting standards Board issues new accounting standards Called Financial reporting standards (FRS)
Also amends ad withdraws old accounting standards
FRS1 issued by ASB in 1991(revised 1996) requires preparation of cash flow statement for each activity period
Talk on FRS1

Question 10

Give two examples of a non-cash expense and non cash gain

Answer 10

Expense- depreciation, increase in provision for bad debts

Gain- Reduction in provision for bad debts, profit on sale of FA

Question 11

Explain cash flow statement

Answer 11

Primary financial statement
Concerned with describing and examining inflows and outflows of cash that lead to change in the cash figure from one B.S to the next.

Question 12

Explain cash flow

Answer 12

Cash flow: the increase or decrease in amount of cash held in business after a transaction has taken place.

Question 13

Explain liquidity

Answer 13

Liquidity: ability of business to pay its current debts as they fall due.

Question 14

What are non-cash items

Answer 14

Non-cash items affect the net profit of the business but not the cash position of the business

Question 15

Give example of when cash does not always equal profit?

Answer 15

Purchase/sale of a FA will increase or decrease cash but does not change the overall profit made.
The introduction of capital or withdrawal of cash affects cash flow but doesn’t change profit.

Question 16

Give example of when profit does not always equal cash?

Answer 16

Credit purchases/sales affect profit not cash.

Non-cash items affect profit and not cash ex:depreciation

Question 17

What is an inflow

Answer 17

Cash received

Question 18

What is an outflow

Answer 18

Cash paid

Question 19

What is FRS 1 (Revised)?

Answer 19

Stands for Financial Reporting Standard No.1 (Revised).
The Accounting Standards Board issued FRS 1-requires large companies to prepare cash flow statements under certain headings.
Also requires large companies to prepare a reconciliation of operating profit to net cash inflow from operating activities.
Also requires large companies to prepare a reconciliation of net cash to movement in net debt.

Question 20

What are the seven headings?- Cash flow statement

Answer 20

Operating activities
Return on investment and servicing of finance
Taxation
Capital expenditure and financial investment
Equity dividends paid
Management of liquid resources
Financing

Question 21

What are initials of the seven headings?- Cash flow statement

Answer 21

ORTCEMF

Question 22

What is step 1 to complete question

Answer 22

Step 1: Calculate the change in net cash and net debt (funds).

Question 23

What is step 2 to complete question

Answer 23

Step 2: Calculate the amount of dividends, taxation and interest paid.

Question 24

What is step 3 to complete question

Answer 24

Step 3: Calculate the adjustments for increase/decrease in debtors, stock and creditors

Question 25

What is step 4 to complete question

Answer 25

Step 4: Calculate the changes in fixed assets, including depreciation

Question 26

What is step 5 to complete question

Answer 26

Step 5: Calculate the changes in the capital structure of the firm (i.e shares and debentures)

Question 27

If an asset increases is it an outflow or inflow

Answer 27

If an asset increases in value, it is an outflow of money (a minus figure)

Question 28

If an asset decreases is it an outflow or inflow

Answer 28

If an asset decreases in value, it is an inflow of money (a plus figure)

Question 29

If an liability increases is it an outflow or inflow

Answer 29

If a liability increases in value, it is an inflow of money (a plus figure)

Question 30

If an liability decreases is it an outflow or inflow

Answer 30

If a liability decreases in value, it is an outflow of money (a minus figure)

Question 31

What goes under the heading Operating activities in cash flow statement

Answer 31

Net cash inflow / (outflow) from operating activities

Question 32

What goes under the heading Returns on investments and servicing of finance in cash flow statement

Answer 32

Investment income (+)
Interest received (+)
Interest paid(-)
Dividends received (+)
Preference paid (-)

Question 33

What goes under the heading taxation in the cash flow statement

Answer 33

Taxation rebate  (overpayment) (+)
Taxation paid (-)

Question 34

What goes under the heading Capital expenditure and financial investments in the cash flow statement

Answer 34

Proceeds from the sale of fixed assets(+)
Proceeds from the sale of investments(+)
Payments to purchase tangible fixed assets(-)
Payments to purchase investments (-)

Question 35

What goes under the heading of Equity dividends paid in the cash flow statement

Answer 35

Ordinary dividends paid(-)

Question 36

What goes under the heading of Management of liquid resources in the cash flow statement

Answer 36

Sale of government securities / liquid assets(+)

Purchase of government bonds or securities(-)

Question 37

What goes under the heading of financing in the cash flow statement

Answer 37

Issue of debentures(+)
Redemption of debentures(-)
Issue of shares(+)
Share premium(+)

Question 38

Layout of Reconciliation of net cash flow to movement in net debt

Answer 38

Increase / (decrease) in cash (from cash flow statement)
Cash used (+)/ received from liquid resources
Cash used (+)/ received from debentures
Change in net debt (funds)
Net debt on 01/01
Net debt on 31/12

Question 39

What non-cash items are included in the reconciliation of operating profit to net cash flow from operating activities- AND SIGNS

Answer 39

Profit(-)/loss(+) on sale of fixed asset
Decrease(-)/increase(+) in provision for bad debt
Depreciation of fixed assets(+)
Goodwill written off (+)

Question 40

For stock, debtors and creditors in the reconciliation of operating profit to net cash flow from operating activities what are inflows

Answer 40

Decrease in debtors /prepayments
Decrease in stock
Increase in creditors / accruals (items due)

Question 41

For stock, debtors and creditors in the reconciliation of operating profit to net cash flow from operating activities what are outflows

Answer 41

Increase in debtors / prepayments
Increase in stock
Decrease in creditors / accruals (items due)