Cash Flows

Question 1

What is a Statement of Cash flows

Answer 1

a document which shows the cash inflows and cash outflows of a company for a period of time

Question 2

5 Purposes of a Statement of Cash Flows

Answer 2

• Assess the ability of a company to generate net cash inflows from the sale of products or the providing of services
• Explains why there is a increase/decrease in cash held from one accounting period to the next
• Provides users with info not shown in the Statement of Comprehensive Income or Balance Sheet
• Compare the cash generating ability of different companies
• Assess the ability of a company to pay its debts

Question 3

What regualtes the rules for contents of statement of Cash Flows

Answer 3

AASB 107 - Statement of Cash Flows

Question 4

What is cash

Answer 4

notes and coins held on the business premises and deposits held at call with a financial institution (bank) - business can withdraw money at any time

Question 5

What are cash equivalents

Answer 5

• Short-term investments that can be easily converted into cash and have an insignificant risk of change in value
  
  • Usually convertible into cash within 3 months

Question 6

What are Cash Flows from Operating Activities?

Answer 6

• Defined through AASB 1016 as cash inflows and outflows relating to the provisions of goods and services and are not investing or financing activities
• They are the receipts and payments from the main revenue raising activities of a business

Question 7

Why is net cash flows from operating activities important?

Answer 7

• If a company is to survive for a long period of time, the cash inflows from selling inventory or providing a service must be greater than the cash outflows to pay for expenses and inventory
  
  • Thus, net cash flow from operating activities is a very important figure

Question 8

What are Cash Flows from Investing Activities?

Answer 8

• Defined through AASB 107 as cash inflows and outflows relating to the purchase and/or disposal of NCAs and the purchase or disposal of investments that have not been included in the definition of cash
• They are cash transactions involving the purchase or sale of NCAs

Question 9

What are Cash flows from financing activities?

Answer 9

Defined through AASB 107 as cash inflows and outflows relating to changes in the size and/or structure of the entity

Question 10

Describe 4 Specific disclosures of AASB 107 - Statment of Cash flows

Answer 10

AASB 107 Statement of Cash Flows states that the following items must be shown separately in a statement of cash flows - Income Tax paid, Interest Received/Paid, Dividends Recieved/Paid

AASB 107 Statement of Cash flows, paragraph 35, states that income tax paid should be shown as an operating cash flow unless income tax payments can be specifically linked to financing or investing activities

AASB 107 Statement of Cash Flows, paragraph 33, states that interest received, dividends received and interest paid can be included in the operating cash flows section as these items are included in the calculation of profit

AASB 107 Statement of Cash Flows, paragraph 34, dividends paid can shown as either an operating cash flow or as a financing cash flow

Question 11

Analysis questions for Statment of Cash Flows

Answer 11

Positive or Negative Operating Figure? A positive net cash from operating activities is a healthy indicator for a business - this is because a business cannot survive in the medium-long term, unless it generates positive cash flows from operating activities

Has the business purchased NCAs that can be used to generate income in the future - a sensible investment in NCAs is a positive indicator for a business

Has the business sold NCAs to finance a negative net cash from operating activities - negative indicator for a business

Did the business have to borrow money or raise additional share capital to cover a negative net cash from operating activities - negative indicator for a business

Has the business used a short-term loan (one year or less) to purchase NCAs - negative indicator as NCAs should be purchased with either long term loans or equity

Is any dividend paid to shareholders larger than the net cash from operating activities - negative indicator as it shows excessive drawings affecting business profitability

Question 12

Accounts Receivable Ledger

Answer 12

Debit - Opening Bal, Sales
Credit - Closing Bal, Sales Returns, Bad Debts, DA, Bank

Question 13

Which goes first; Inventory or Acc. Payable

Answer 13

Inventory

Question 14

Inventory Ledger

Answer 14

Debit - Opening Bal, Acc Payable
Credit - Closing Bal, COS, Purchase Returns

Question 15

Accounts Payable Ledger

Answer 15

Debit - Closing Bal, Discount Recieved, Purchase Returns, Bank
Credit - Opening Bal, Inventory

Question 16

RE Ledger

Answer 16

Debit - Closing Bal, General Reserve, Dividends
Credit - Opening Bal, General Rserve, Profit after tax

Question 17

Prepaid expense ledger

Answer 17

Debit - Opening Bal, Expense Paid
Credit - Closing Bal, Expense

Question 18

Accrued Expense Ledger

Answer 18

Debit - Closing, Bank
Credit - Opening, Profit + Loss

Question 19

Unearned Income ledger

Answer 19

Debit - Closing Bal, Fees (earned)
Credit - Opening Bal, Bank

Question 20

Interest Income

Answer 20

Debit - Accrued Int Income (opening), Profit + Loss
Credit - Accrued Int Income (closing), Bank (int recieved)

Question 21

Allowance for DD Ledger

Answer 21

Debit - Closing Bal, Bad Debts
Credit - Open Bal, DD

Question 22

Other Expenses Ledger

Answer 22

Debit - Dep of NCA, Loss on Sale of Asset, Bank
Credit - Profit + Loss