Cash Flows

Question 1

Cash Flow Statement Layout

Answer 1

Cash flows from operating activities, cash flows from investing activities, cash flows from financing activities, net in/decrease in cash held during the year, cash and cash equivalents balance at beginning of year, end of year

Question 2

Cash flows from operating activities layout

Answer 2

Cash receipts from customers, cash paid to suppliers and employees, cash generated from operators, interest paid, income taxes paid (tax from previous year), NET CASH USED IN OPERATING ACTIVITIES

Question 3

Cash flows from investing activities layout

Answer 3

Proceeds from sale of machinery & equipment, dividends received, interest received, purchase is machinery & equipment, NET CASH USED IN INVESTING ACTIVITIES

Question 4

Cash flows from financing activities layout

Answer 4

Borrowings from mortgage, additional share capital (add share costs), share issue costs, dividends paid, proceeds from unsecured notes, NET CASH USED IN FINANCING ACTIVITIES

Question 5

Comment on a cash flow balances

Answer 5

• Cash and cash equivalents balance for x has … during the past year from an (overdraft) balance of xx as of .. to a (cash at bank) balance as of …
• This is due to net increase/decrease in cash held during the year of xxx.
• Overall, the cash position of the company is …

Question 6

Comment on cash flow reasons

Answer 6

• If increase/decrease of … was due to financing activities, operating activities, investing activities. How they weigh against each other.
• If it is satisfactory, any major concerns, profit made.

Question 7

Comment of cash flows operating

Answer 7

• How much cash generated from operations
• If the cash generated was offset by an expense (ie income tax)
• If income tax decreased in the past year compared to the one before then business operations haven’t been as successful

Question 8

Comment on cash flows investing

Answer 8

• Whether net out/flow was due to purchase or disposal of assets.
• Where the financing for purchase of asset came from

Question 9

Comment on cash flows financing

Answer 9

• If the company has taken out a loan or debenture/repayed one
• New loans result in increased interest payments = cash flow from operating activities will improve.
• If dividends paid is in line with profit-making activities and operating activities. (Satisfactory or nah?)

Question 10

Comment on cash flows liquidity

Answer 10

• Is liquidity satisfactory or not
• If the company can meet commitments when they are due
• Lots of interest and high net cash outflow from operating activities is bad

Question 11

Importance of statement of cash flows

Answer 11

• Evaluates change in net assets, financial structure and ability of entity to adapt to changing circumstances and opportunities.
• Assess the ability to generate cash flows and assess present value of future cash flows of different entities.
• Compare operating performance of different entities.
• Predict future cash flows.
• Check accuracy of past assessments of future cash flows
• Examine relationship between profitability and net cash flows.

Question 12

Examples of how a business with an operating loss can report positive cash flow from operations

Answer 12

• Receipt of revenue in advance
• Large number of accrued expense
• Sales predominantly cash but supplies on credit
• Large non-cash expenses

Question 13

If dividend paid out is smaller than net cash of operating activities…

Answer 13

indicates the business has retained some profits rather than paying dividends. Check whether this money is being efficiently invested in the investing activities section.

Question 14

Explain why a business’ cash balance at the end of a financial year is not a reliable
indicator of its profitability.

Answer 14

Income statement, which shows profit, being prepared on a different basis to cash flow statement, which shows the movement in bank balance.
Income statement is prepared with accrual accounting, cash flow statement is prepared with cash accounting. With accrued accounting, income is recorded when earnt not received and expenses are recorded when incurred not paid.
The cash flow statement shows only cash received and paid. The income statement also includes non-cash items like depreciation expenses and changes in allowance of doubtful debts.

Question 15

Statement of financial position vs statement of cash flows

Answer 15

SOFP only shows the cash position on a single date, not how it changed over the period like a cash flow statement. I,e. blah blah

Question 16

Statement of comprehensive income be statement of cash flows

Answer 16

SOCI shows over the period but is on an accrual basis, and doesn’t show how cash is being generated by operators. I,e, cash flow statement shows net cash from operating activities as xxx, and net profit for the period was xx.

Question 17

Explain why you need more than just net profit after tax when analyzing business performance.

Answer 17

Profit only takes into account less expenses, doesn’t take into account whether business has enough cash to meet its debts when they fall due. Cash flow statement gives that information.
IE, may have large amount of sales but if debtors don’t pay them on time then there may be cash flow issues,