L13/14: Statement of Cashflows

Question 1

What does the Statement of Cashflows provide information about?

Answer 1

Provides information about liquidity and solvency

Question 2

State and explain the different headings in the Statement of Cashflows

Answer 2

Operating - Cash flows arising from the principal revenue-producing activities of the entity.

Investing - Cash flows arising from the acquisition and disposal of non-current assets.

Finance - Cash flows arising from changes in equity and borrowings.

Question 3

What does operating, investing and financing link with in the SoFP?

Answer 3

Operating - Working capital: inventory, trade payables, trade receivables, tax and interest payable. Retained earnings

Investing - Non-current assets: property, plant and equipment, intangible assets, long-term investments

Financing - Bank loans and other non-current liabilities, share capital and share premium, retained earnings

Question 4

Explain the direct and indirect method of accounting for cashflows and what the UK uses

Answer 4

Direct method is determining cash inflows and cash outflows directly from the cash book. e.g. Cash received and cash paid out to suppliers and employees

Indirect method is Starting with either the SoPL or SoFP and making adjustments (reversing accruals accounting) to arrive at the companies Operating Cash flows.

via. Five steps method to reconcile.

Question 5

What is the five-step method used in Indirect method of getting operating cash flows.

Answer 5

1. Start with profit before tax or after tax from SoPL
2. Adjust back to operating profit if using after tax
3. Adjust for anything that isn’t a cash flow and/or doesn’t relate to operating activities. These include:
   I ) Add back depreciation expense
   ii) Add back amortisation expense
   iii) Add back loss on disposal of PPE/intangible assets
   iv) Subtract profit on disposal of PPE/intangible assets
   v) Add back impairment of PPE/intangible assets
   vi) Add back bad debt expense
   vii) Gain/loss on disposal of investments
4. Carry out working capital adjustments for changes in Inventory, Trade receivables & payables, Accruals
   Prepayments, Deferred income/contract assets

• (this year v last year in SoFP) for adjustments

5. Calculate tax paid and interest paid on separate lines.

Question 6

Investing activities is either Cash paid or Cash received from?

Answer 6

acquiring PPE/intangibles/investments

or selling them.

Question 7

State the order of the Statement of Cashflows

Answer 7

Net Cash inflow/(outflow) ) from operating activities =
Net cash inflow/(outflow) from investing activities =
Net cash inflow/(outflow) from financing activities =
————————————————————————-
Net increase/(decrease) in cash and cash equivalents =

Cash and cash equivalents at the end of the year =