The Cash Flow Statement

Question 1

What does the cash flow statement show

Answer 1

• summaries all movement of cash in and out of a business
• summaries inflow and outflow of cash

Question 2

Cash equivalent

Answer 2

• any liquid money. Money that is expected to be collected in the short term.
• if it can be converted into cash within 3 months, this is treated as cash-equivalent

Question 3

Classifications of cash flows

Answer 3

1. Operating activities
2. Investing activities
3. Financing activities

Question 4

Operating activities

Answer 4

Cash inflows & outflows
- inflows from sales of goods and services
- outflows to employees for services etc

Question 5

Investing activities

Answer 5

Anything that is bringing the business money but is not part of the business

Question 6

Two different methods of operating activities

Answer 6

1. Direct method: only showing cash movement e.g. cash received from sales.
2. Indirect method: start of the profit and adjust for any-non cash movement. It takes profit before tax from the income statement.

Question 7

Explain why it is important for a company to be aware of their cash flow position

Answer 7

Because cash is a very important element of most businesses
They need cash to be able to trade on a day-to-day basis e.g. to pay trade suppliers and for other expenses
If they don’t, they may experience a slowdown of the business as they would be unable to trade and purchase materials

Question 8

Financing activities

Answer 8

• changes in non-current liabilities
• e.g. from sale of ordinary shares, dividends, from issuance of long term debt