Chapter 5 Flashcards
What does the Statement of Cash Flows show?
It shows actual cash inflows and outflows during a specific period.
How does the Income Statement differ from the Statement of Cash Flows?
The Income Statement records revenue and expenses, not cash movements, whereas the Statement of Cash Flows tracks actual cash.
What’s the key point about profit and cash flow?
Profit and cash flow are linked but don’t always move together due to factors like credit sales or inventory changes.
What are the three major financial statements?
Statement of Financial Position (Balance Sheet)
Income Statement
Statement of Cash Flows
What does the Statement of Financial Position show?
It shows assets, liabilities, and equity at a specific point in time.
What is the accounting equation?
Assets = Equity + Liabilities
What are Cash and Cash Equivalents?
Cash: Notes, coins, bank deposits accessible immediately.
Cash Equivalents: Short-term, liquid investments like treasury bills.
What are the three categories in the Statement of Cash Flows?
Operating Activities
Investing Activities
Financing Activities
What are Operating Activities?
Cash inflows/outflows from day-to-day operations, like sales or payments for expenses, taxes, and interest.
What are Investing Activities?
Cash flows related to purchasing or selling long-term assets (e.g., property, equipment).
What are Financing Activities?
Cash flows from funding, such as issuing shares, taking loans, or repaying debts.
What is the Direct Method of preparing cash flows?
It tracks all cash inflows/outflows directly from business transactions. It’s detailed but rarely used.
What is the Indirect Method of preparing cash flows?
Starts with profit and adjusts for non-cash items and changes in working capital (inventory, receivables, payables).
What is the formula for Net Cash Flow from Operating Activities (Indirect Method)?
Begin with profit before tax.
Add back non-cash expenses (e.g., depreciation).
Adjust for changes in:
Inventory (increase = outflow, decrease = inflow).
Receivables (increase = outflow, decrease = inflow).
Payables (increase = inflow, decrease = outflow).
Subtract cash payments for interest, tax, and dividends.
What is the relationship between the Income Statement, Statement of Financial Position, and Statement of Cash Flows?
The Income Statement affects equity (via profits or losses).
The Statement of Cash Flows explains changes in cash during the period.
Together, they link the starting and ending financial position of the business.
