Lesson 15: Statement of Cash Flows

Question 1

What are Cash equivalents?

Answer 1

Cash equivalents refer to short term, highly liquid investments which are readily convertible to cash without any significant risk of changes in value.

These investments usually have a maturity of 3 months or less when acquired.

Question 2

What are the Classifications of Cash Flows?

Answer 2

-Operating activities
-Investing activities
-Financing activities

Question 3

What are Operating Activities?

Answer 3

This refers to net cash inflow/outflow from PRINCIPAL REVENUE-GENERATING or TRADING ACTIVITIES

Question 4

What are Investing activities?

Answer 4

These refers to the increases and decreases of NON-CURRENT ASSETS, such as PPE, and investment in other countries.

PURCHASES AND SALES OF THESE ASSETS, INTERESTS AND DIVIDENDS RECEIVED FROM INVESTMENTS are investing activities.

Question 5

What are Financing Activities?

Answer 5

These activities obtain cash from, and pay cash to, investors and creditors.
(e.g. Issuing shares, borrowing money, buying treasury shares, paying cash dividends and paying off a loan and interests).

Question 6

What are the limitations of statement of cash flows?

Answer 6

The cash in the balance sheet may be inflated by delaying payment of creditors for a few days or by making substantial purchases in the next accounting period instead of the current one.

This is called Window Dressing