Cash Flow Statements Flashcards
define cash flow statements
records the cash inflows and cash outflows classified under certain headings such as cash flows from operating
define cash
consists of cash on hand and demand deposits
define cash equivalents
short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
define cash flows
inflows and outflows of cash and cash equivalents
sources and uses of cash
Sources
- customers
- interest received
- dividends received
- issue of share
- receipt of loans
- sale of non-current assets
Uses
- suppliers
- wage & salaries
- overheads
- interest paid
- dividends paid
- loan repayments
- purchase of non-current assets
- corporation tax paid
define net cash flow
analysed into the sources and uses of cash according to activity
what are the operating activities?
cash flows from trading/ operating activities net of tax and interest
what are investing activities?
- cash paid for property, plant and equipment and other non-current assets
- cash received on the sale of property, plant and e equipment and other non-current assets
- cash paid for investments in or loans to other enterprises
- cash received for the sale of investments or the repayment of loans to other enterprises
what are financing activities?
Inflows include:
- receipt from issuing shares or other equity instruments
- receipts from issuing debentures, loans, notes and bonds and from other long term and short term borrowings (not overdrafts)
Outflows include:
- repayments of amounts borrowed (other than overdrafts)
- payments to reacquire or redeem the enterprises shares
standard layout of the statement of cash flows
cash flows from operating activities \+/- cash flows from investing activities \+/- cash flows from financing activities = net increase/decrease in cash and cash equivalents over the period
purpose/ usefulness of cash flow statements
- helps to assess the ability of the company to generate cash
- compare the performance of different companies
- historical cash flows are an indicator of timing, amount and certainty of future cash flows
- reveals the manner in which investing activities have been financed
- tracking sources and uses of cash over several years could show financing and investing trends.
importance of cash
- needs to pay wages
- pay day-to-day runnings costs
- buy stocks
- buy new fixed assets
simple cash flow equation
opening cash + inflows - outflows = closing cash
define overtrading
a business may make a profit but run out of cash
Indirect method steps
- calculation of operating profit by adjusting profit before taxation
- calculate operating profit, adjust profit before tax
- add interest paid and deduct interest received - reconciliation of operating profit to operating cash flow
i) working capital adjustments
- short term adjustments
e. g. increase in stock, debtors or prepayments = less cash flowing in business
e. g. decrease in stock, debtors or prepayments = more cash flowing
ii) non-cash flow items
- depreciation added back to profit = cash flow
- profit and loss of sale fo fixed asset deducted
