Cash Flow Statements (A) Flashcards
what could be asked in the exam?
- importance of cash flow to organisation
- distinguish between 3 different types of cash flows
- describe major features of IAS 7
- prepare and interpret CFS
- critically assess the utility of the CFS
what is the IAS7?
international accounting standards 7
what are the 3 types of cash flows?
- operating
- investing
- financing
why are cash flows important to a company?
survival of a company depends not so much on profit earned but on liquidity / solvency and therefore ability to generate cash flows
what happened in 1992?
IASB issued the IAS7 cash flow statements which became effective in 1994 which mandates that firms must provide cash flow statements
why is cash so important?
- users need cash
- liquidity = success
- accruals concept disguises cash flow
- income statement isn’t enough to tell us about liquidity situation
why can a company fail even if they have good income statement but no cash?
- profit may not convert into cash e.g. bad debts
- repayment of loans takes cash out of the business but has no direct effect on profit
what is an income statement?
= PROFIT
sets out revenues and expenses
difference is profit or loss - the increase / decrease in wealth not cash
- indication of performance but profit isn’t a tangible thing
what is profit based on?
- obligations to pay (TR)
- cost of sales (only includes inventory sold)
- interest payable on loans and tax payable
- operating expenses, which don’t always mirror cash position§,
what are the main differences between cash and profit?
- matching concept, e.g. matching sales to the cost (realisation of payment / accruals)
- income S only looks at one year whereas cash is longer term of liquidity
what is cash basis?
- measures only cash movements during the period
- not subject to estimation or assumptions, more objective
- cover expenditure on long term assets and movements in fucning as well as operating activity, provide us with additional information
why have a cash flow statement?
- cash is king, necessary for survival
- users of financial statements can be misled by profits
- provides additional info on business activities
- distinguish between cash flows generated from trading and other cash flows
- enhances comparitibailty
- easier for users to understand
- primary sttamnet
what can cash flow statement help to identify/
- why cash has decrease despite healthy profit
- whether the trading activities generate cash as well as profit
- how the new bank loan spent
- how business generates and utilises cash
- liquidity
what is the format for cash flows (IAS7)
- cash flow from operating activities
- cash flows from investing activities
- cash flow from financing activities
- net increase (or decrease)in cash and cash equivalents over the period
(three parts)
what is the definition of cash?
- comprises cash at bank and n demand less over drafts repayable on demand
cash + bank - overdrafts
what are cash equivalents?
almost cash, if you needed them they can be turned into cash very fast
liquid investments
what is operating activities?
- principal revenue producing activities of the entity and other activities that are not investing or financing activities
day to day operating stuff, whatever your in business to achieve that would come under this section
e.g. trading receipts and payments
biggest section
what are investing activities’
the acquisition and disposal of long term assets and other investments
any money spent on non current assets or any money made on them
e.g. cash received for selling non current asset
what are financing activities?
activities that result in chances in the size and composition of the equity capital borrowing of an entity
cash proceeds from share issue, repayment of loan capital
what are the ways of preparing cash flow S?
in direct
direct
only difference is the way in which operating activities is presented, indirect method is required by syllabus and is less time consuming
direct - you record every single amount of money to every single customer and show who, giving away confidential informatio
why do companies prefer indirect?
- easier to prepare
- not to disclose sensitive info such as cash paid to employees or suppliers
how do you make indirect method to same net cash flow as direct?
instead of doing a long list of money in and out
working it out indirectly
start off with cash position and make adjustments, adjust it for all the none cash expenses
s
what are the adjustments needed to be made in indirect?
- depriaction
- changes in working capital (TR - don’t necassarily represent cash position)
what are current assets?
- inventory
- trade receievables
- accruals
what are your current liabilities?
- trade payables
- accruals
in order to make adjustments on working capital items what do you need?
SOFP from this year and the last, you have to find out how much they’ve increased or decreased by
that difference will be your adjustment
- if your current assets increase in value this decreases cash flow, you have spent some out - deduct from operating profit
- if current liabilities increased this would cause an increase in cash flow as you still owe people money , you add it on to operating profit figure
what do you do with deprecation?
non cash expense, doesn’t represent cash that has gone out
out back deprecation onto operating profit figure and later on the off the actual amount
what does the operating profit section look like for indirect section?
OPERATING PROFIT plus deprecation increase or decrease in inventory I/D trade reciebales I/D prepayments I/D trade payables I/D accruals LESS interest paid LESS tax paid LESS dividend paid
= net cash flows from op actitvities
what is the last section of the cash flow statement?
net ____ cash and cash equivalents
cash and cash equivalents 31/12/2017
cash and cash equivalents 31/12/2018
how can you work out the last section first?
net = total of 3 sections
you can find cash at start of period and cash at end, can already work out if there’s an increase of decrease, can work out if you have done statement wrong
