Statement of Cash Flows (SOCF)

Question 1

what is the cash flow statement?

Answer 1

a report that shows how cash has entered and left the business over a period of time

Question 2

what does the cash flow statement consist of?

Answer 2

cash flow generated from operating activities

cash flow generated from financing activities

cash flow generated from investing activities

Question 3

cash flow generated from operations?

Answer 3

• most important part of SOCF
• shows how much cash was actually generated from selling the company’s products or services
• cash from core business activities

Question 4

cash flow from investing activities?

Answer 4

cash spent/received from investments

cash from outside of the core business

Question 5

cash flow from financing activiites?

Answer 5

• cash transactions that involved raising, borrowing or repaying capital

(e.g., common stock issued, dividends paid, bank loan taken out, debt repayment)

Question 6

at the bottom of the SOCF…?

Answer 6

shows a reconciliation to the balance sheet

shows cash at the beginning and end of the period

Question 7

cash flow statement equation?

Answer 7

beginning cash + CF operations + CF financing + CF investing = ending cash balance

Question 8

two types of SOCF?

Answer 8

indirect and direct method

Question 9

what does the variation in SOCF method impact?

Answer 9

CF investing activities and CF operations

Question 10

indirect method?

Answer 10

takes net income from I/S as starting point

issue is that net income doesn’t equal cash

therefore indirect method includes lots of adjustment line items

Question 11

direct method?

Answer 11

doesn’t start with net income, lists various transactions that produces cash amounts received/paid

e.g., cash received from customers, cash paid to suppliers, cash paid to employees

Question 12

which SOCF method is GAAP?

Answer 12

both indirect and direct method are accepted by GAAP and IFRS

Question 13

indirect method characteristics?

Answer 13

• accepted by GAAP & IFRS
• linked to P&L & SOFP
• used by most companies
• CF operations includes net income and various adjusting line items

Question 14

direct method characteristics?

Answer 14

• accepted by GAAP & IFRS
• easier to read with better insight
• very time consuming
• CF operations doesn’t include net income, but various CF line items

Question 15

does net income = cash?

Answer 15

no

various non-cash transactions impact cash flow

Question 16

examples of non-cash transactions that impact net income?

Answer 16

• depreciation/amortisation is a non-cash transaction
• gain/loss on disposal of assets is a non cash transaction
• sales made on credit
• purchases made on credit
• increase/decrease in inventory

Question 17

how is CF operations calculated with indirect method?

Answer 17

• get net income from I/S
• adjust for non-cash transactions impacting net income (e.g., depreciation, amortisation, gains/losses on sale of NCA’s etc)

Question 18

how is CF investing activities impacted by non-cash transactions?

Answer 18

• depreciation/amortisation impacts net income, but doesn’t impact cash
• gain/loss on disposal impacts net income, but not cash

Question 19

cf investments + cf operations + cf financing = ?

Answer 19

net change in cash

net change in cash + beginning cash = ending cash

Question 20

changes in working capital?

Answer 20

consists of changes in inventory, receivables and payables balances

Question 21

adjustment to cf from inventory?

Answer 21

higher inventory in B/S = cash is decreasing

lower inventory in B/S = cash is increasing

• adjustments need to be made because net income is impacted by COGS