Introduction To Cash Flow Statements Flashcards
1
Q
Why is Cash Needed?
A
- Required to service debt to other organisations
- Require liquidity to cover unforeseen circumstances
2
Q
What does Cash show that Profit does not?
A
- Income Statement shows profit, but some items haven’t been paid for or have non-cash equivalents (depreciation and inventory)
- Cash movement is objective
- Shows long-term expenditure
- Shows control of profits
3
Q
Why do you use a cashflow statement?
A
- “Cash Is King”
- Users of FS can be misled by profits
- Provides more information
- Can distinguish between inflows, outflows and Trading Transactions
- Enhances Comparability
- Easier to Understand
- Matching concept disguises cash flow
4
Q
What is Cash? Give an Equation
A
- Bank + Cash on demand - Overdraft
5
Q
What is a Cash Equivalent?
A
- Short-Term, liquid assets that can be easily changed into cash within 3 months
6
Q
Name the 3 Sections to the Cash Flow Statement
A
- Cash Flows from OPERATING activities
- Cash Flows from INVESTING activities
- Cash Flows from FINANCING activities
7
Q
Name the two methods that the International Accounting Standard 7 employ for a Cash Flow Statement
A
- Direct Method (Not used)
- Indirect Method
- Direct Method includes every single transaction in the whole system (long)
8
Q
What is the Process of a Cash Flow Statement (OA) ?
A
- Begin with Operating Profit (Come from Income Statement)
- Add back the years’ depreciation
- Add/Subtract changes in Inventory (TP, TR, Prepayments and Accruals)
- Subtract the years’ tax, interest or dividends
- This gives Cash Flow Operating Activities
9
Q
What is the Rule for Current Assets and Current Liabilities, and their effect on the Cash Flow
A
- Assets; Increases/Decreases (-/+)
- Liabilities; Increases/Decreases (+/-)
10
Q
What is at the end of the Net Inflows/Outflows?
A
- Reasons for the results
- Conclusions to the results
