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Accounting > Cashflow Statement > Flashcards

Cashflow Statement Flashcards

1
Q

What is a Statement of Cashflow?

A
  • It reports on the sources and uses of cash for the year and thus, explains reasons for the changes in cash position over the year.
  • It shows where the business gets its cash from and how it is applied.
  • It reports the extent to which profits have contributed towards the supply of funds.
  • It also indicates whether it is in a position where future liquidity is doubtful.
  • It reconciles the amount of profit earned for the period with the increase or decrease in cash and bank balances during the same period.
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2
Q

Purpose of Cashflow Statement

A
  • It predicts future cash flows: It enables users to assess the firm’s ability to generate cash to meet the cash requirements of the business
  • It evaluates management decisions: This statement provides information on the changes in the net assets and financial structure of the firm, facilitating evaluation of solvency and liquidity
  • It shows the relationship of net income to cash flows: The statement explains the relationship between profitability and liquidity generated over a period of time
  • It aids in financial planning: Management needs info on future cash flows to predict any future cash surplus or shortage
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3
Q

Retained Earnings Adjustments

A

Beginning RE +/- Net Profit/Net Loss - Interim Dividends - Proposed/Final Dividends = Ending RE

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4
Q

Depreciation Adjustment

A

Beginning Provision for Depn + Annual Depn - AD of Disposed Assets = Ending balance of Provision of Depn

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5
Q

ARR Adjustment

A

Beginning ARR +/- Gain on Reval/Loss on Reval - ARR used in BI = Ending ARR

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6
Q

Sale of PPE Adjustments

A

Beginning PPE(NBV) + Acquisition Cost - Depn - Book Value Asset Sold = Ending PPE (NBV)

Cash Received = Cost of Investments Sold +/- Gain/Loss on Sale

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7
Q

Sale of Investments Adjustment

A

Beginning Investments + Purchase Cost of Investments - Cost of Investments Sold = Ending Investments

Cash Received = Cost of Investments Sold +/- Gain/Loss on Sale

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8
Q

Sale of Investments Adjustment

A

Beginning Investments + Purchase Cost of Investments - Cost of Investments Sold = Ending Investments

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9
Q

LT Borrowing Adjustments

A

Beginning Bal of LT Debt + Cash Received from New Borrowings - Payment of Debt = Ending Balance of LT Debt

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10
Q

Issuance of Shares Adjustments

A

Beginning Share Capital + Cash Received from Issue of New Shares + Bonus Share Capital - Payment for Treasury Shares = Ending Share Cap

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11
Q

Interest on LT Borrowing Adjustments

A

Beginning Balance of Int Payable + Interest Expense - Interest Paid = Beginning Balance of Int Payable

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12
Q

Dividends Adjustments

A

Beginning Balance of Dividends Payable + Total Dividends Declared - Cash Paid for Dividends = Ending of Dividends Payable

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13
Q

Cash Flow from Operating Activities Segment

A
  1. NPBI
    Adjustments for:
  2. Add: Depreciation
  3. Add: Loss on sale of PPE/ Less: Gain on Sale of PPE
  4. Add: Impairment Loss
  5. Add: Loss on Sale of Investments / Less: Gain on Sale of Investments
    Operating Cash Flows before Movement in WC
  6. Add: Decrease In Inventories / Less: Increase in Inventories
  7. Add: Decrease in TR / Less: Increase in TR
  8. Add: Increase in TP / Less: Decrease in TP
    Cash Used in Operations
    Net Cash Used in Operating Activities
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14
Q

Cash Flows from Investing Activities Segment

A
  1. Purchase of NCA (-ve)
  2. Purchase of Investment (-ve)
  3. Proceeds from Sale of NCA
  4. Proceeds from Sale of Investment
  5. Dividend Received
  6. Interest Received
    Net Cash Used in Investing Activities
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15
Q

Cash Flows From Financing Activities Segment

A
  1. Proceeds From Issuance of Shares
  2. Proceeds from Borrowings
  3. Repayment of Borrowings (-ve)
  4. Interest Paid (-ve)
  5. Dividend Paid (-ve)
    Net Cash Used in Financing Activities
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16
Q

Last Part of Cash Flow Segment

A
  1. Net Increase / Decrease in Cash and Cash Equivalents
  2. Cash and Bank Balance at Beginning of Year
  3. Net Increase / Decrease in Cash and Cash Equivalents
  4. Cash and Bank Balance at End of Year
17
Q

Factors to Consider in WC Management

A
  • Cash and Bank Balances
    A minimum healthy bank balance should be maintained to satisfy daily requirements. Keeping too much cash is not an efficient way of using funds as cash does not earn any income and is an idle asset
  • Uses of ST Finances
    It is advisable to make prudent use of ST credit as a source of finance, ensuring that payment terms are met. Failure to pay TP can results in lower credit rating, supplies being cut off or legal actions being tajen by creditors
  • Meeting Other Financial Commitments
    Management must plan in advance for adequate funds to meet its capital expenditure, income tax, dividends and interest
18
Q

Limitations of Statement of Cash Flows

A
  • It gives no indication of the problems caused by seasonal peaks. A company’s cash position as reflected in the cash flow statement may appear perfectly satisfactory but the company may need a much higher cash balance during the year
  • Actual pattern of cash flow may be erratic. The actual pattern of cash flow over time is often not as smooth as indicated by CFS. It may be erratic and therefore is not indicative of the LT performance of the firm.
  • Ignores seasonal demands for cash. Gives no indication of problems caused by seasonal peaks. A company’s cash position as reflected in the cash flow statement may appear perfectly satisfactory but it may need a much higher cash balance sometime during the year.
  • Focuses on financial activities only
  • Incomplete picture of cash paid or received. Does not show actual cash paid to creditors or money received from debtors. Only shows increase or decrease in debtors / creditors, which is not a complete picture of cash flow.
19
Q

What is meant by Cash and Cash Equivalents?

A

Cash equivalents refer to short term, highly liquid investments which are readily convertible without any significant risk of changes in value. These investments usually have a maturity of 3 months or less when acquired. Therefore, cash flows refer to the inflows and outflows of cash and cash equivalents during the financial year

20
Q

Ways to Improve WC Management

A
  • Review Inventories holding for overstocked and slow moving items and factor when making purchasing decisions.
  • Use JIT system of inventory management to avoid holding too much inventories
  • Review credit policies to ensure the credit worthiness of customers.
  • Review credit policies of slow paying customers, improve debt collection procedure
  • Maximise credit period, negotiate more favourable credit terms from TP
  • Arrange adequate LT financing to avoid using overdraft to finance purchases of NCA or repayment of loans as overdraft is an expensive source of LT financing

Accounting (6 decks)

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