Cash flows Flashcards
What is the main difference between Profit and Cash Flows?
Profit is based on accrual accounting (recognizes revenues/expenses when earned/incurred), while cash flow reflects actual cash inflows and outflows during the period.
Why can profit differ from cash flows?
Due to non-cash expenses (like depreciation), timing differences in cash receipts/payments (like accounts receivable and payable), and other accruals.
Why are both Profit and Cash Flow important?
Profit shows value creation; cash flow shows liquidity and the ability to meet short-term obligations. They are best used together for a full picture.
Examples of non-cash items causing profit and cash flow differences?
-Depreciation, amortization, impairment (non-cash expenses)
-Gains on asset sales (non-cash income)
-Changes in inventory, receivables, and payables
What is ‘Quality of Earnings’?
The extent to which reported profits are converted into actual net cash inflows. Low quality of earnings can indicate financial problems.
What are Cash and Cash Equivalents?
Short-term, highly liquid investments that are easily convertible into known amounts of cash with insignificant risk of value changes (e.g., notes, coins, demand deposits).
Where are Cash and Cash Equivalents reported?
In the Statement of Cash Flows and in the Statement of Financial Position under current assets.
What is included in the ‘Net Cash’ figure at the end of the Statement of Cash Flows?
Closing cash and cash equivalents minus bank overdrafts.
What are the three main categories in the Statement of Cash Flows?
Operating Activities
Investing Activities
Financing Activities
What are Operating Activities in the Statement of Cash Flows?
Cash flows from normal business operations, like manufacturing, sales, administration, interest received/paid, and taxes.
What are Investing Activities in the Statement of Cash Flows?
Cash flows from buying/selling non-current assets like property, equipment, or investments.
What are Financing Activities in the Statement of Cash Flows?
Cash flows from transactions with owners and lenders, e.g., issuing shares, borrowing/repaying loans, paying dividends.
Indirect vs. Direct Method for Operating Activities?
Indirect method: Starts with operating profit, adjusts for non-cash items and working capital changes.
Direct method: Lists all major operating cash receipts and payments directly.
How does the Statement of Cash Flows complement the Statement of Comprehensive Income?
By providing insight into actual liquidity and cash movements, compared to profitability under accrual accounting.
