IAS 7 - Statement of Cash Flows

Question 1

Why do we do a Statement of cash flow?

Answer 1

a cash flow statement tracks the inflow & outflow of cash providing insights to a company health.

Question 2

Why does the profit made during the period not equate to an increase in cash and bank balances?

Answer 2

What is needed therefore is a statement that commences with the profit made during the period and show how that profit and other transactions during the same period have an affect on the flow of cash.

Question 3

What are the 3 main reasons profit earned does not equal bank & cash balances?

Answer 3

1. Profit is calculated on an accruals basis, which means that revenue is recognised when it is earned, not when it is received, and expenses are deducted on the same basis to match revenue.
2. The calc of profit includes some items that do not affect cash. for example, profit for the year is determined after
   *deducting depreciation WHICH INVOLVES NO MOVEMENT IN CASH.
   * PorL on a disposal on NCA, but it is the proceeds from the sale that will affect the cash and bank bal
   * accrued taxation
3. Bank & cash balances are affected by some items that do not affect profit such as purchase of NCA (only depreciation affects profit.

Question 4

What are the 3 title within Statement of Cash Flows?

Answer 4

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities

Question 5

Explain operating activities?

Answer 5

are the principal REVENUE PRODUCING activities. This section of the statement begins with cash generated from operations.

Question 6

Explain investing activities?

Answer 6

include cash spent on NCA, proceeds from the sale of NCA and income from investments

Question 7

Explain financing activities?

Answer 7

includes the proceeds from the issue of shares, dividends paid to shareholders and long-term borrowings made or repaid.

Question 8

There are 2 methods of calculating cash from operations, explain?

Answer 8

• Direct method
• Indirect method

Question 8

What are cash equivalents?

Answer 8

short-term, highly liquid investments that are readily convertible to know amounts of cash and are subject to an insignificant risk of changes in value.

Question 9

Can you explain Direct Method when calculation cash from operations?

Answer 9

The direct method of presenting cash generated from operations provides more DETAILED info that the indirect method as it is based upon cash flow info extracted directly from the accounting records. As this method discloses info that would otherwise REMAIN CONFIDENTIAL most companies choose not to use the direct method. WAGES

Question 10

Can you explain Indirect Method when calculating cash from operations?

Answer 10

Indirect method reconciles profit before tax (as reported in the SOPL)

Question 11

When we start the Statement of Cash Flows we have to calculated CASH GENERATED FROM OPERATIONS using Indirect Method (FIRST)

Answer 11

We take the PROFIT BEFORE TAX and we make adjustments to show CASH GENERATED FROM OPERATIONS. Before we deduct “Interest paid” and “Taxation paid”. And we produce “Net cash from operating activites”.

Question 12

How do we calculated CASH GENERATED FROM OPERATIONS?

Answer 12

Profit before tax X
Depreciation charge for the period (ADDED) X
Profit from disposal of NCA (X)
Finance costs payable X
Investment income

Question 13

Why do we ADD back the Depreciation charge?

Answer 13

We initially deducted this expense in the P&L but because there is no literally cash transaction we ADD it back to profit.