Statement of cash flows

Question 1

What does the statement of cash flows do?

Answer 1

Shows changes in an entity’s cash by classifying cash flows during the period according to operating, investing, and financing activities.

Question 2

What is the importance of the statement of cash flows?

Answer 2

Assists users to assess liquidity and solvency
Assists users to assess financial adaptability
Assists users to assess future cash flows
Cash flow means survival
Helps to highlight cash generation
Cash flows are objective
Can provide early indicator of problems

Question 3

What is cash?

Answer 3

cash on hand and in bank including overdrafts.

Question 4

What is cash equivalent?

Answer 4

short-term, highly liquid investments that are readily convertible to a known amount of cash with an insignificant risk of changes in value eg short-dated treasury bills.

Question 5

What are operating activities?

Answer 5

the main revenue producing activities of an entity.

Question 6

What are investing activities?

Answer 6

the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Question 7

What are financing activities?

Answer 7

changes to equity and borrowings of the entity.

Question 8

What three sections does IAS7 break the statement of cash flows into?

Answer 8

Operating activities -the main revenue-producing activities of the entity

Investing activities -the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents

Financing activities-are activities that alter the equity capital and borrowing structure of the entity

Question 9

What is the direct method of cash flows?

Answer 9

Direct method favoured by IAS 7, but not required
Direct Method calculation

Cash receipts from customers X
Cash receipts from other operational sources X Cash payments to suppliers (X)
Cash payments to employees (X)
Cash payments for expenses (X)
Cash generated from operations X

Question 10

What are the benefits of the direct method of cash flows ?

Answer 10

Adds information not disclosed elsewhere
Shows cash flows from trading
Useful information for estimating future cash flows

Question 11

What is the indirect method of cash flows?

Answer 11

Profit before taxation X
Adjustments for:
(i) Non-cash items
Depreciation/Amortisation/Impairments X
Provision increase/decrease X/(X)
(Profit)/loss on disposal (X)/X
(ii) Non-operating items
Interest receivable/investment income(eg dividends received) (X)
Finance costs X
Operating profit before W/C changes X
(iii) Working Capital changes:
(Increase)/Decrease inventories (X)/X
(Increase)/Decrease trade/other receivables (X)/X
Increase /(Decrease) trade/other payables X/(X)
Cash generated from operations X

Question 12

What are the adjustments for non-cash items?

Answer 12

Depreciation is not a cash flow. Add back to profit.

Provisions are not a cash flow they are an accounting entry. Add provision back to profit if provision increased or deduct from profit if provision decreased.

Acquisition/disposal of non-current assets: investing activities

Loss on disposal should be added back. It is a non-cash expenses deducted.

Profit on disposal should be subtracted. It is a non-cash reduction to expenses (or increase in income).

Question 13

What are the adjustments for non-operating items?

Answer 13

Interest received: Deducted and cash received will be included under investing activities.

Investment income (dividends received): Deducted and cash received will be included under investing activities

Interest payable: Added back and actual cash appears after cash generated from operations

Question 14

What are the adjustments for working capital movements?

Answer 14

Change in receivables: Increase in receivables means less cash in bank, more cash owed. Decrease in receivables means increase to cash.

Change in inventory: Increase in inventory means less cash as more asset. Decrease in inventory is increase to cash.

Change in payables: Increase is more cash, and decrease is less cash.

Question 15

What are other cash flows from operating activities?

Answer 15

Inerest paid

Income tax paid

Question 16

What would the T account look like for interest / income tax payable?

Answer 16

Interest /Income tax payable
Bank –cash X. Balance b/d SOFP X
Balance c/d(SOFP)X Profit or loss X
X X

                                           Balance b/d X

Question 17

What are the cash in flows from investing activities?

Answer 17

Interest received
Dividends received
Proceeds from sale of non-current assets

Question 18

What are the cash outflows from investing activities?

Answer 18

Purchase of non-current assets

Question 19

What would the Trial balance fro Interest/dividends received look like?

Answer 19

Balance b/d (SOFP) X Bank –cash X
Profit or loss X Balance c/d (SOFP)X
X X
Balance b/d X

Question 20

What would the NCA cash paid to acquire carrying amount t account look like?

Answer 20

Balance b/d (SOFP)X Disposal (carrying amount) X
Additions –cash X Depreciation for the yearX
Revaluation gain for the yearX Balance c/d (SOFP)X
X X
Balance b/dX

Question 21

What would the T account for cash received on disposal of NCA look like?

Answer 21

Cost X Accumulated DepreciationX
Profit on Disposal (SPL)X Loss on Disposal (SPL)X Bank-cash
X X

Question 22

What are the cash inflows from financing activities?

Answer 22

Proceeds from share issue

Proceeds from issue of loans/debentures

Question 23

What are the cash outflows from financing activities?

Answer 23

Repayment of loans

Dividends paid

Question 24

What would the T account for proceeds from new shares look like?

Answer 24

Balance c/d share capitalX Bal b/dsharecapital(sofp)X
Balance c/d share premium X Bal b/d share prem (SOFP)X
(SOFP)……………………… Proceeds from share issue X
X X

                                                                    Bal b/d

Question 25

What would the T account for proceeds/ repayments of loan and debentures look like?

Answer 25

Repayment of loans -cashXBalance b/d (SOFP)X
Balance c/d (SOFP)X Proceeds from loans-cash X

X X

                                                       Balance b/dx

Question 26

What would the T account look like for dividend paid?

Answer 26

Dividends paid-cashX. Balance b/d (SOCIE) X
Balance c/d (SOFP)X Profit or loss for the year X

X X