Topic 7 Flashcards
What does the statement of cash flows show?
Cash inflows and outflows over a specific accounting period.
What are the three main sections of a cash flow statement?
Operating activities, Investing activities, Financing activities.
Why is cash important even when a business makes a profit?
Because profit doesn’t guarantee liquidity — businesses need cash to pay bills and survive.
What does the term ‘going concern’ mean?
That a business is expected to continue operating into the foreseeable future.
What are ‘cash equivalents’?
Highly liquid investments with a maturity of 90 days or less (e.g., short-term deposits).
Give two examples of cash flows from operating activities.
Cash received from customers; cash paid to suppliers or for expenses.
What is an example of a cash inflow from investing activities?
Proceeds from the sale of property, plant, or equipment.
What is an example of a cash outflow from financing activities?
Repayment of borrowings or dividends paid.
How is the direct method of calculating cash flows from operations structured?
Lists actual cash inflows from sales and outflows for purchases and expenses.
What is the indirect method of calculating operating cash flow?
Starts with operating profit and adjusts for non-cash items and working capital changes.
Name two non-cash adjustments made in the indirect method.
Depreciation and amortization.
How does an increase in inventory affect cash?
It results in a cash outflow.
How does a decrease in trade receivables affect cash?
It results in a cash inflow.
How does an increase in trade payables affect cash?
It results in a cash inflow.
Why can’t the cash flow statement stand alone to assess a company’s health?
It doesn’t show profitability or cash-generating potential of assets.
What does the statement of profit or loss show?
Income earned and expenses incurred, resulting in profit or loss.
What accounting concept ensures that only business-related transactions are recorded?
Business entity concept.
What does the prudence concept advise?
Caution in judgement — avoid overstating assets or income.
What is the matching (accruals) concept?
Income and related expenses should be recorded in the same period.
What is the purpose of the consistency convention?
To ensure financial information is comparable across periods.
