Chapter 16 (Statement of cash flows)

Question 1

Which are the three activities described in a cash flow statement?

Answer 1

1. Operating cash flow (“the principal revenue-producing activities of the entity…”)
2. Investing cash flow (“the acquisition and disposal of long-term assets and other investments not included in cash equivalents”)
3. Financing cash flow ( “activities that result in changes in the size and composition of the contributed equity and borrowings of the entity”)

Question 2

Which are the two methods used for reporting the cash flow statement?

Answer 2

1. Direct method

2. Indirect method

Question 3

What is the starting point for the indirect method?

Answer 3

The profit or loss for the period (before tax) and then adjusts this profit

The indirect method takes as its starting point the profit or loss for the period (before tax) and then adjusts this profit or loss so as to calculate the total amount of cash generated from operations.

Question 4

Name two adjustments to profit/loss when calculating cash from operations

Answer 4

Depreciation, Interest payable

Question 5

A company presents the following. Profit before tax 100. Depreciations 40. Ingoing balance for inventory 500 and outgoing 580. Ingoing balance for machinery 1000 and outgoing 1200. Calculate operating cash flow.

Answer 5

60

Question 6

A company presents the following. Profit before tax 100. Depreciations 40. Ingoing balance for inventory 500 and outgoing 600. Ingoing balance for machinery 1000 and outgoing 1200. Calculate the investments

Answer 6

240 (Cash outflow of 240)

Om det är en outflow så är det väl minus antar jag?

Question 7

There are five adjustments when calculating cash flow from operations. Which of the following examples is not one of them?

a) Interest income/expense
b) Decrease in the allowance for doubtful receivables
c) Increase/decrease in inventory
d) Depreciations

Answer 7

Man justerar INTE a), d.v.s. interest income/expense.

Det man faktiskt justerar är följande:

1. Decrease in the allowance for doubtful receivables

Non-cash income which has been included in the calculation of profit or loss but which does not involve an inflow of cash (e.g. a decrease in the allowance for doubtful trade receivables) is subtracted.

2. Increase/decrease in inventory

Adjustments are required for the increases/decreases in inventories, trade receivables and trade payables between the beginning and end of the accounting period. Similar adjustments will be required for prepaid expenses and accrued expenses if these are shown separately in the financial statements

3. Depreciations

Non-cash expenses which have been deducted when calculating profit or loss but which do not involve an outflow of cash (e.g. depreciation) are added back. Interest payable is also added back.

4.

Profits or losses on the disposal of non-current assets are subtracted (profits) or added back (losses). The actual sale proceeds of such assets are shown later in the statement of cash flows as a cash inflow from investing activities.

5.

Items of income or expense which have been included in the calculation of profit or loss but which represent cash flows from investing activities or financing activities are subtracted (income) or added back (expenses).