Chapter 11 Cashflow Flashcards
What are the three main activities of a cash flow statement?
1) Operating Activities
2) Investing Activities
3) Financing Activities
Where does the cash flow from operating activities come from?
They come mainly from the business main revenue driving activities. Therefore they generally enter the determination of profit and loss from a company.
Why is the cashflow from operating activities important?
Cash flows from operating activities is an important indicator of a company’s ability to generate sustainable cash flows through operations and its management of working capital( CA -CL )
For a company to survive in the long run it has to have a positive operating cash flow
What are cash flows from investing activities and what do they represent?
Cashflows from investing activities represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. (Purchase of PPE, investment in FVPL/FVOCI and loans)
What are cashflows from financing activities?
Useful in predicting claims on future cash flows by providers of capital to the business. They provide information as to how investing activities are being financed.
What are the two methods for calculating operating cashflow?
1) Indirect Method
2) Direct Method
What is the indirect method?
P&L adjusted for
1) the effects of transactions of a NON-CASH Nature.
2) Any deferrals or accruals of past or future operating cash receipts or payments (Change in working capital)
3) And items of income/expense associated with investing or financing cash flows
What is the general format for operating cashflows using the indirect method
Net income before tax
Add/Less
Non Cash Items
Interest Income/expenses, dividend income
Changes in working capital
Interest paid/received , dividend received/paid
Income Tax
(NICII)
Draw the table for relationship between Current Asset, Current Liability and CFs
IF CA increases, Cash subtract [CA has inverse relationship]
IF CL Increases, Cash addition [CL has proportional relationship]
Is there a difference in accounting for Investing & Financing activities for direct and indirect method?
No, there is no difference for investing and financing.
How is the direct method calculated?
Direct method involves adjusting each item on the P&L from an accrual basis to a cash basis
What is the general formula for the direct method’s operating activities?
C - ash collected from customers through revenue. Starting
O - perating expenses [Careful for prepaid expenses [ subtract mostly ]]
E - employees. Cash paid to employees through wages and salaries [Subtract]
I - interest paid. [Subtract]
S - suppliers. Cash paid to accounts payables [Subtract]
I - ncome Tax [Subtract]
What is the effect of non cash transactions on the cash flow statement?
Non cash transactions in investing and financing activities should be excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the financial statements that provides relevant information about such investing and financing activities. An example includes the issue of shares in exchange for PPE
What are the two aspects of quality of income?
1) Ability of current income to forecast future income
2) Proportion of current income in cash
What is the Quality of income formula and what does it tell you?
QOI ratio = CF from operating activities / Net income
The QOI ratio tells us the portion of net income that was generated by operating activities.
This also means that the higher the CF from operating activities, the greater the company is able to meet its operating and other cash needs for operations.
If the ratio decreases, this signifies that the company is generating net income from either investing or financing activities and implies that earnings are growing faster than operating CFs
