Lecture 6: Statement of Cash Flows Flashcards
1
Q
Cash definition
A
Cash is the resource that keeps a business running.
2
Q
Statement of cash flows
A
Reports the operating, investing and financing cash flows of a business over a period - allows analysis of cash flow performance.
3
Q
Importance of cash flow knowledge
A
- 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
4
Q
Reconcilliation
A
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’
5
Q
Classifications in the statement of cash flows
(3)
A
- Operating activites - cash flows from pincipal revenue generating activites and flows that are not investing/financing
- Investing activities - cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents
- Financing activities - cash flows that result in changes in the size and composition of the contributed equity and borrowings of the entity.
6
Q
What does the cash flow statement allow a user to analyse about the business?
(4)
A
- Generate its own cash flows
- Meet financial commitments (interest, principal, dividends)
- Fund expansion/investments/diversification
- Obtain external finance