Lecture 6: Statement of Cash Flows

Question 1

Cash definition

Answer 1

Cash is the resource that keeps a business running.

Question 2

Statement of cash flows

Answer 2

Reports the operating, investing and financing cash flows of a business over a period - allows analysis of cash flow performance.

Question 3

Importance of cash flow knowledge

Answer 3

• Investors - better indicator of earnings quality compares to profit and loss as cannot be skewed through earnings management as cash is tangible asset
• Lenders - to assess whether the business have sufficient cash to meet principal and interest repayments

Question 4

Reconcilliation

Answer 4

A process that has to occur when the business has some accounts in overdraft and the overdraft has to be deducted from ‘cash and cash equivalents’

Question 5

Classifications in the statement of cash flows

(3)

Answer 5

1. Operating activites - cash flows from pincipal revenue generating activites and flows that are not investing/financing
2. Investing activities - cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents
3. Financing activities - cash flows that result in changes in the size and composition of the contributed equity and borrowings of the entity.

Question 6

What does the cash flow statement allow a user to analyse about the business?

(4)

Answer 6

1. Generate its own cash flows
2. Meet financial commitments (interest, principal, dividends)
3. Fund expansion/investments/diversification
4. Obtain external finance