Statement of Cash Flows

Question 1

What does IAS 7 relate to?

Answer 1

IAS 7 covers the Statement of Cash Flows

• To ensure entities provide information about historical cash flows.
• To classify those cash flows according to the activities that created them

Question 2

What are the activities that create cash flows?

Answer 2

Operating Activities - Main revenue generating activities of the business.

Investing Activities - Acquisition and disposal of long term assets and other investments.

Financing activities - Activities which alter the equity and long term borrowing of the entity.

Question 3

What are cash equivalents?

Answer 3

Cash equivalents are short term highly liquid investments i.e. short dated government bonds.

Question 4

How is the reconciliation of cash to profit from operations using the indirect method laid out?

Answer 4

Profit before Tax

Add/Less:

Non cash items included

Non operating items included

Finance costs

Movements in working capital

Cash generated from operations.

THINK - Good/Bad for cash - Good = add back/ Bad = deduct.

Question 5

What are the cash flows relating to investing activities?

Answer 5

• Purchases and sales of PPE - movement will need to be adjusted for Dep’n, revaluations and disposals.
• Interest received - Consider what has been paid (expense) and what has been accrued.
• Dividends received.
• Purchases from Investments.

With PPE & interest it may be easier to lay it all out in a T account and identify the balancing figure.

Question 6

What are the cash flows relating to Financing activities?

Answer 6

• Proceeds from share issues - overall movement in share capital and premium.
• Loans - look at changes in balance of loan liabilities.
• Dividends paid - should be provided in the notes.

Question 7

What can cash flow information show about a business?

Answer 7

Cash flow information can be used to identify company performance:

• Cash generated from operations - Working capital, reasons and causes of movement.
• CapEx - Significant sales of assets may be raising funds
• Sources of finance - New loans increased costs going forward. is the company in a good position for paying dividends
• net cash flow - carefully consider reason for changes.