Ch 13 - IAS 7 Statement of cash flows Flashcards
Why do we do a Statement of cash flow?
a cash flow statement tracks the inflow & outflow of cash providing insights to the health of a company.
Why does the profit made during the period not equate to an increase in cash and bank balances?
I think this answer is actually based on when profit is calculated and the items included in profit that do not have an effect on the cash & bank balances.
RE:- Profit calculated on an accruals basis - REVENUE is recognised when it is earned not when it is received, the same as the deduction of expenses to match revenue.
What are the 3 main reasons PROFIT earned does not equal bank & cash balances?
- Profit is calculated on an accruals basis, which means that revenue is recognised when it is earned, not when it is received, and expenses are deducted on the same basis to match revenue.
- The CALC OF PROFIT includes some items that do not affect cash eg, profit for the year is determined after :-
* DEDUCTING DEP, which involves no movement in cash..
* P&L on a DISPOSAL on NCA, but it is the proceeds from the sale that will affect the cash & bank bal
* ACCRUED TAXATION - Bank & cash balances are affected by some items that do not affect profit such as purchase of NCA (only depreciation affects profit.
What are the 3 titles within Statement of Cash Flows?
- Cash flows from OPERATING activities
- Cash flows from INVESTING activities
- Cash flows from FINANCING activities
Explain OPERATING activities?
are the principal REVENUE PRODUCING activities. This section of the statement begins with cash generated from operations.
Explain INVESTING activities?
Includes:-
- cash spent on NCA’s
- proceeds from the sale of NCA’s &
- income from investments
Explain FINANCING activities?
Includes the
- proceeds from the issue of shares;
- dividends paid to shareholders &
- long-term borrowings made or repaid.
There are 2 methods of calculating cash from OPERATIONS, explain?
- Direct method
- Indirect method
What are cash equivalents?
- short-term;
- highly liquid investments
that can be quickly converted to KNOWN amounts of cash with minimal risk of value change.
Can you explain Direct Method when calculating “Cash generated from OPERATIONS”?
The direct method of presenting “Cash generated from OPERATIONS” provides more DETAILED info than the indirect method as it is based upon cash flow info extracted directly from the accounting records. As this method discloses info that would otherwise REMAIN CONFIDENTIAL most companies choose not to use the direct method. e.g. WAGES
Can you explain Indirect Method when calculating “Cash Generation from Operations”?
Indirect method reconciles from profit before tax.
- Profit before taxation from the SOPL;
- Adjusting it for non-cash items &
- Converting the income and expenses figure from accruals basis to cash basis
So that just the CASH FLOWS GENERATED FROM OPERATING activities remain.
When we start the Statement of Cash Flows we have to calculated CASH GENERATED FROM OPERATIONS using Indirect Method (FIRST)
We take the PROFIT BEFORE TAX and we make adjustments for non-cash items, then change revenue & expenses from accruals basis to cash basis to show CASH GENERATED FROM OPERATIONS. Before we deduct “Interest paid” and “Taxation paid”. And we produce “Net cash from operating activites”.
How do we calculated CASH GENERATED FROM OPERATIONS?
Profit before tax X
Depreciation charge for the period (ADDED) X
Profit from disposal of NCA (X)
Finance costs payable X
Investment income
Why do we ADD back the Depreciation charge?
We initially deducted this expense in the P&L but because there is no literally cash transaction we ADD it back to profit.
Why is INTEREST RECEIVED and INVESTMENT INCOME adjusted in the Statement of Cash Flows?
Interest received and investment income are NOT considered part of the day-to-day OPERATIONS.
The amount from the SOPL should be DEDUCTED from the profit because this is not necessarily the amount that has been received.
Where does INTEREST RECEIVED and INVESTMENT INCOME sit in the Statement of Cash Flows?
These 2 sit in the “Cash Flows from Operating Activities”
Where do FINANCE COSTS sit in the Statement of Cash Flows?
They sit in the “Cash Flows of OPERATIONAL Activities” HOWEVER is not considered part of the day-to-day operations and will be adjusted. As this is an expense in the SOPL it should be added back to the profit.
Changes in RECEIVABLES, where does this sit in the Statement of Cash Flows?
Changes in Receivables sits in the Operating activities, under WORKING CAPITAL CHANGES:-
- An increase in RECEIVABLES is a reduction in cash DEDUCT (the more the customer owes the less cash in the bank)
- A decrease in RECEIVABLES is an increase in cash ADD BACK.
Changes in INVENTORY, where does this sit in the Statement of Cash Flows?
Changes in INVENTORY sits in the Operating activities, under WORKING CAPITAL CHANGES:-
- An increase in INVENTORY is a reduction in cash DEDUCT (the more we buy, the less cash in the bank
- A decrease in inventory is an increase to cash
Producing a Statement of Cash Flows helps to highlight???
Where cash is being generated - the CASH FLOW STATEMENT will clearly detail cash that is being generated from CORE activities of the business and other non-operating activites.
An adequate cash position in the longer term is essential for ???
enable asset replacement.
Cash flows are objective…..
A CASH FLOW is a matter of fact!
whereas the calculation of profit is subjective.
What else is hidden in Finance Costs?
INTEREST PAID - which is considered cash flow from operating activities and there is a Pro-Forma to be completed.
What is the Pro-forma to calculate Interest Payable (the CASH MOVEMENT) ??
. Interest payable
CASH ??? Bal b/fwd X
P&L X
Bal c/fwd X
XX XX
What are the CASH INFLOWS & OUTFLOWS from investing activities?
Cash INFLOWS from investing activities may include:-
* interest received;
* dividends received &
* proceeds from the sale of NCA’s
Cash OUTFLOWS from investing activities may include:-
* purchases of NCA’s
Can you give a detailed description of the lines in “Cash Flows from INVESTING Activites”?
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of PPE (X)
Purchase of investments (X)
Proceeds from sale of PPE X
Proceeds from sale of investments X
Interest Received X
Dividends Received X
NET CASH FROM INVESTING ACTIVITIES (X)
