Statement of Cash Flows

Question 1

The need for the statement of cash flows (4)

Required by?
Cash flow is vital for?
Cash is more…?
Provides information about: (3)

Answer 1

• Required by IAS 7 Statement of Cash Flows
• Cash flow is vital for the survival of a company
• Cash more easily understood, less easily manipulated
• Provides information about liquidity, viability, and financial adaptability

Required by IAS 7, it is vital for the survival of a company.

Question 2

What does cash flow represent in a business context?

Answer 2

Cash flow = Cash in – Cash out

It is vital for a business to maintain operations, including purchasing inventory and paying liabilities.

Question 3

Cash flow examples (5 in, 5 out)

Answer 3

In:

• Capital introduced
• Cash sales
• Receipts from trade receivables
• Disposal of assets
• Rent income
• Cash loan

Out:

• Wages & salaries
• Cash purchases
• Payment to trade payables
• Cash rent payment
• Dividends, interest, tax

Question 4

Profit versus cash flow

• Financial Statements are prepared under the __________ basis following the _____________ principle.
• As a result, the statement of comprehensive income shows ____________ ________ in a period not the ______ ____________ from ________.
• Similarly, it shows the ____________ ___________ in generating the __________ not the ______ ____________ ________.
• The cash flow statement ignores ___________ and simply looks at ______ __ ________ _________ _____.

Answer 4

• Financial Statements are prepared under the accruals basis following the matching principle.
• As a result, the statement of comprehensive income shows revenue earned in a period not the cash received from sales.
• Similarly, it shows the expenditure incurred in generating the revenue not the cash actually paid.
• The cash flow statement ignores accruals and simply looks at cash in versus cash out.

Question 5

The format and preparation of the SoCF

Answer 5

2 methods permitted by IAS 7:

Direct:

• cash inflows and outflows as they occur e.g. receipts from customer, payments to suppliers

Indirect:

• starts with profit before tax and adjusts for non-cash items.