Cash Flow Statements Flashcards
Explain solvency
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
What is a financial reporting standard?
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
What are the implications of reduced gearing for business
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
Give five purposes of cash flow statements
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
Give four obligations of a large public company under the companies act
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
Outline the responsibility of directors of a company
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
What is a cash expense vs a non cash expense
Cash expense reduces both profit and cash ex: wages
Non cash reduces profit and not cash ex: depreciation, provision for bad debts
Explain why earning profit does not always result in a corresponding increase in cash balances
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
What is the Accounting standards board- influence on cash flow statements
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
Give two examples of a non-cash expense and non cash gain
Expense- depreciation, increase in provision for bad debts
Gain- Reduction in provision for bad debts, profit on sale of FA
Explain cash flow statement
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.
Explain cash flow
Cash flow: the increase or decrease in amount of cash held in business after a transaction has taken place.
Explain liquidity
Liquidity: ability of business to pay its current debts as they fall due.
What are non-cash items
Non-cash items affect the net profit of the business but not the cash position of the business
Give example of when cash does not always equal profit?
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.
Give example of when profit does not always equal cash?
Credit purchases/sales affect profit not cash.
Non-cash items affect profit and not cash ex:depreciation
What is an inflow
Cash received
What is an outflow
Cash paid
What is FRS 1 (Revised)?
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.
What are the seven headings?- Cash flow statement
Operating activities
Return on investment and servicing of finance
Taxation
Capital expenditure and financial investment
Equity dividends paid
Management of liquid resources
Financing
What are initials of the seven headings?- Cash flow statement
ORTCEMF
What is step 1 to complete question
Step 1: Calculate the change in net cash and net debt (funds).
What is step 2 to complete question
Step 2: Calculate the amount of dividends, taxation and interest paid.
What is step 3 to complete question
Step 3: Calculate the adjustments for increase/decrease in debtors, stock and creditors
What is step 4 to complete question
Step 4: Calculate the changes in fixed assets, including depreciation
What is step 5 to complete question
Step 5: Calculate the changes in the capital structure of the firm (i.e shares and debentures)
If an asset increases is it an outflow or inflow
If an asset increases in value, it is an outflow of money (a minus figure)
If an asset decreases is it an outflow or inflow
If an asset decreases in value, it is an inflow of money (a plus figure)
If an liability increases is it an outflow or inflow
If a liability increases in value, it is an inflow of money (a plus figure)
If an liability decreases is it an outflow or inflow
If a liability decreases in value, it is an outflow of money (a minus figure)
What goes under the heading Operating activities in cash flow statement
Net cash inflow / (outflow) from operating activities
What goes under the heading Returns on investments and servicing of finance in cash flow statement
Investment income (+) Interest received (+) Interest paid(-) Dividends received (+) Preference paid (-)
What goes under the heading taxation in the cash flow statement
Taxation rebate (overpayment) (+) Taxation paid (-)
What goes under the heading Capital expenditure and financial investments in the cash flow statement
Proceeds from the sale of fixed assets(+)
Proceeds from the sale of investments(+)
Payments to purchase tangible fixed assets(-)
Payments to purchase investments (-)
What goes under the heading of Equity dividends paid in the cash flow statement
Ordinary dividends paid(-)
What goes under the heading of Management of liquid resources in the cash flow statement
Sale of government securities / liquid assets(+)
Purchase of government bonds or securities(-)
What goes under the heading of financing in the cash flow statement
Issue of debentures(+)
Redemption of debentures(-)
Issue of shares(+)
Share premium(+)
Layout of Reconciliation of net cash flow to movement in net debt
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
What non-cash items are included in the reconciliation of operating profit to net cash flow from operating activities- AND SIGNS
Profit(-)/loss(+) on sale of fixed asset
Decrease(-)/increase(+) in provision for bad debt
Depreciation of fixed assets(+)
Goodwill written off (+)
For stock, debtors and creditors in the reconciliation of operating profit to net cash flow from operating activities what are inflows
Decrease in debtors /prepayments
Decrease in stock
Increase in creditors / accruals (items due)
For stock, debtors and creditors in the reconciliation of operating profit to net cash flow from operating activities what are outflows
Increase in debtors / prepayments
Increase in stock
Decrease in creditors / accruals (items due)
