Chapter 27&28

Question 1

What is the purpose of statements of cash flows?

Answer 1

• To show the reasons for the change in the cash and bank balance over the accounting year.
• To show the manner in which cash has been generated
  and used during the year.
• To show the effects on cash flows of an entity’s operating,
  investing and financing activities for a given period.
• To provide information that assists in the assessment of
  liquidity, solvency and financial adaptability.

Question 2

What is the basic structure of
statements of cash flows

Answer 2

1. Cash Inflows
   - Cash outflow
   = Increase (or decrease) in cash over the period

Question 3

What is a STATEMENT OF PROFIT or LOSS?

Answer 3

– the statement
of P/L shows the profit, whereas the SCF shows the reasons for the change in cash. Profit is not the same as an increase in cash, it is only one source of cash;

Question 4

What is a STATEMENT OF FINANCIAL POSITION?

Answer 4

– the SOFP
is a list of the assets, liabilities and capital at the end of the year, whereas the SCF identifies the changes in assets, liabilities and capital during the
year and the resulting effect on cash.

Question 5

What is cash flows

Answer 5

‘inflows and outflows of cash and cash equivalent’

Question 6

What is Cash

Answer 6

cash on hand and demand deposits

Question 7

What is demand deposits?

Answer 7

• are repayable on demand if they can be
  withdrawn at any time without notice and without penalty, or if
  they are at maturity, or have a period of notice of not more than 24 hours or one working day has been agreed.

Question 8

What are Cash equivalents?

Answer 8

• ‘short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value’ (IASB, IAS 7,
  2018)

Question 9

What are operating activites?

Answer 9

• Operating activities are the principal revenue producing activities of the entity and other activities
  that are not investing or financial activities.

Question 10

What are Cash flows from operating activities?

Answer 10

are primarily
made up of the net increase (or decrease) in cash that results from a company’s normal trading activities.

Question 11

What is direct method in P/L?

Answer 11

• Involves converting all the individual
  items in the statement of P/L from an accruals basis to a cash basis.
• It shows the cash received from
  customers, cash paid to suppliers, and
  cash paid in wages and for operating
  expenses.

Question 12

What is the structure of direct method?

Answer 12

• Reconstruct control accounts for:
  1. Cash received from customers
  2. Cash paid to suppliers
  3. Cash paid to employees
  4. Interest paid
  5. Tax paid
• Opening and closing SoFP balances +
  figures from SPL

Question 13

What is indirect method?

Answer 13

The indirect method involves adjusting the profit or loss before tax for:
* The effects of transactions of a non-cash nature, such as profits and losses on the disposal of non-current assets and movements in allowances (irrecoverable
debts).
* Deferrals or accruals of past or future operating cash receipts or payments (changes in working capital); and
* Items of income or expense associated with investing or financial cash flows.

Question 14

What is investing activities?

Answer 14

• Investing activities –
  ‘the acquisition and disposal of non-current assets and other investments not included in cash
  equivalents’.