chapter 11: statement of cash flows

Question 1

what is a cash flow statement

Answer 1

it provides information on the cash flows of a business that is not available in the SOFP and income statement cuz theyre prepared on an accrual basis

1. reveals the cash effects of movements in working capital
2. helps users predict future cash flows
3. help users assess how liquid the business is

Question 2

the cash flow statement provide users with the mechanisms for what

Answer 2

statement is needed as a consequence of the difference between profits and cash

mechanisms provided:
1. providing additional information on business activities
2. assessment on the current liquidity of a business
3. showing an overview of the major sources business cash flows
4. guide to estimate future cash flows
5. identifying cash flows generated from trading as opposed to other sources of finance

Question 3

what are the 3 standard headings cash flows are classified under

Answer 3

1. operating activities
2. investing activities
3. financing activities

Question 4

what are the general contents under operating activities

Answer 4

• operating profit adjusted for depreciation
• profit or losses on sale of non current assets
• interest paid and working capital changes (increase/ decrease in inventories, receivables and payables

Question 5

what are the general contents under investing activities

Answer 5

• purchases of non-current assets and proceeds on the sale of such assets

Question 6

what are the general contents under financing activities

Answer 6

• proceeds on the issue of shares and loan notes and the redemption of certain classes of shares and loan notes

Question 7

what are operating activities

Answer 7

the main revenue-producing activities of an enterprise that are not investing or financing activities - operating cash flows include cash received from customers and cash paid to suppliers and employees

Question 8

what are investing activities

Answer 8

acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents

Question 9

what are financing activities

Answer 9

activities that alter the equity capital and borrowing structure of the enterprise

Question 10

what is the direct method of showing net cash inflow from operating activities

Answer 10

showing actual receipts and payments in arriving at net cash inflow from operating activities and eliminates the effects of accounting methods

Question 11

what is the indirect method of showing net cash inflow from operating activities

Answer 11

the method adjusts the operating profit with non-cash items and changes in net working assets

Question 12

what is the effect of increase in cash on the cash flow statement

Answer 12

increase in cash:

1. decrease in current assets
2. increase in current liabilities

Question 13

what is the effect of decrease in cash on the cash flow statement

Answer 13

1. increase in current assets
2. decrease in current liabilities

Question 14

what are the advantages of statement of cash flow

Answer 14

• cash flow statement can highlight inadequacy of cash flows which may not be apparent from analysing the income statement and SOFP - prepared using accrual accounting principles
• cash information may be helpful to payables when making credit and loan decisions
• full cash flow statement will allow the reader of FS to determine whether cash flows from operations are enof to pay financial obligations
• cash flow is objective than profits