The Statement of Cash Flows Flashcards
What is Cash? IAS 7 Statement of cash flows, Proforma statement of cash flows, prepareing the operating cash flows using indirect method, preparing the operating cash flows using the direct method, cash flows from investing activities, putting it all together
What are the 3 sections of the statement of cash flow?
1) Operating activities
2) Investing activities
3) Financing activities
What are the two methods of operating activities?
Indirect method and direct method
What are the operating activities?
Operating activities are the main revenue producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.6, 7.14].
What is the indirect method?
Net profit/loss adjusted for non-cash items and working capital adjustments
What is the direct method?
Shows actual cash receipts and payments from customers/suppliers. It is difficult to prepare as information is not readily available.
What are investing activities?
Investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6]. This also includes the receipt of dividends from investments held by the entity.
What are financing activities?
Financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6], such as the issue of shares, the receipt or repayment of loans and the payments of dividends to an entity’s own shareholders.
When preparing the operating cash flows using the indirect method, what do you need to adjust for?
- Non-cash items
- Items that are dealt with elsewhere
- Working capital movements
How do you adjust for non-cash items in the operating cash flow?
Depreciation, Amortisation, P on disposal of NCA, L on disposal of NCA
Depreciation - Add
Amortisation - Add
Profit on disposal of NCA - Deduct
Loss on disposal of NCA - Add
How do you deal with ‘items dealt with elsewhere’ when preparing operating cash flows?
Review SOPL and additional information given in the assessment and identify items which have been included in profit from operations but form parts of investing or finance activities: Other Income (from investments)
How do you deal with working capital when preparing operating cash flows?
These adjustments are required as our financial statements are prepared on an accruals basis. However, cash from operations is based on when the cash is paid or received.
Increases or decreases in working capital must be adjusted for as they will have impacted on the profit. By adjusting for these we are removing the accruals treatment.
Inventory = (Increases)/decreases
Trade Receivables = (Increases)/decreases
Trade Payables = increases/(decreases)
Where is tax and interest paid deducted from in the cash flow?
Cash generated for operations.
What is the calculation for taxation?
Tax liability b/f - X
Tax expense - X
Tax liability c/f - (X)
= Cash paid (balancing figure)
What is the calculation for interest payable?
Interest payable b/f - X
Interest expense - X
Interest payable c/f - (X)
= Cash paid (balancing figure)
What are the 4 possible items in investing activities?
- Purchase of PPE
- Proceeds of the sale of PPE
- Interest received
- Dividends received.
