Statement of Cash Flows

Question 1

Financial Statements of Limited Companies:

Answer 1

• The third statement required by IAS 1, Presentation of Financial Statements is the Statement of Cash Flows.
• This must be produced annually in addition to the Income Statement and the Statement of Financial Position.

Question 2

Importance of a Statement of Cash flows :

Answer 2

• The statement of cash flows reveals movements in cash flows in key areas and provides useful information on:

1. How much cash was generated (sources of funds)
2. How much cash was spent and where (application of funds)
3. The new investing and financing activities that have taken place
4. How the company has financed its growth (i.e. internally or externally)

Question 3

Why are ther Profit and Cash Flow Differences ?

Answer 3

• The main reasons for the differences between profit flows and cash flows are:

1. Non cash items e.g. depreciation
2. Sales and purchases on credit
3. Accruals and prepayments
4. Capital expenditure / disposal of assets
5. Raising cash through loans or share issue / repayment of loans; share buyback

Question 4

The statement of cash flows:

Answer 4

• The statement of cash flows is a summary statement that reconciles the opening and closing cash balance in a period:

Closing Cash = Opening Cash + Cash Receipts – Cash Payments

• The receipts and payments are grouped under certain headings to make the statement more meaningful

Question 5

The relationship between Statement of Financial Position, Income Statement and Statement of Cash Flow

Answer 5

Question 6

Cash and Cash Equivalents =

Answer 6

IAS 7 Statement of Cash Flows defines cash as notes and coins in hand, on deposits in banks, and in similar institutions accessible to the business on demand.

Question 7

Layout of the Statement of Cash Flow

Answer 7

Question 8

Cash Flows from Operating Activities =

Answer 8

• These arise from the main revenue generating activities of the business

Consists of:

1. Cash receipts from selling goods, and service etc.
2. Cash payments to suppliers for goods and services
3. Cash payments for operating and admin expenses
4. Cash payments or refunds in taxes
5. Cash payments for interest on borrowings
6. *Payment of dividends (see also financing activities)

• It is a key indicator of the company’s ability to pay dividends, make new investments and repay loans

Question 9

Determining the Net Cash Flows From Operating Activities =

Answer 9

• The direct method can be cumbersome and so many businesses do not adopt this method.
• The indirect method is far simpler as revenue and expenditure have already been determined for the income statement and can be used as the starting point to determine cash flows.

Question 10

The indirect method =

Answer 10

Question 11

Cash Flows from Investing Activities

Answer 11

• Concerned with the disposal and acquisition of non-current assets including investments.

Consists of

1. Cash receipts from disposal of non-current assets or financial investments
2. Cash payments for acquisition of non-current assets or financial investments

• Represents the extent to which the entity has invested in capital expenditure

Question 12

Cash Flows from Financing Activities

Answer 12

• Concerned with the long-term financing of the business (equity and long term borrowing)

Consists of:

1. Cash receipts from the issue of shares
2. Cash receipts from issue of debentures, long term borrowing
3. Cash payments from redemption of debentures
4. Repayment of loans
5. Dividends paid (IAS 7 allows inclusion of dividends paid under this heading as an alternative to Operating Activities)

Question 13

Interpreting the Statement of Cash Flows

Answer 13

• The statement shows the main sources and uses cash.
• Analysing the cash flow statements over several periods may show a pattern of cash movements which can help management to forecast better.