Week 19-20: Reporting on the Cash position of an Entity Flashcards
Why is cash important for a business?
Needed for expenses, investments, and debt payments
What does the statement of cash flows report?
Cash inflows and outflows during a period
How is the statement of cash flows related to other financial statements?
Links net income (income statement) to cash (balance sheet)
What are the three sections of the cash flow statement?
Operating, investing, and financing activities
What are cash equivalents?
Short-term, highly liquid investments
What falls under operating activities?
Cash from sales, payments to suppliers/employees
What falls under investing activities?
Buying/selling assets and investments
What falls under financing activities?
Issuing stock, borrowing/repaying loans, paying dividends
Why exclude non-cash transactions?
They don’t affect cash flow
How does depreciation affect cash flow?
No cash impact, added back in indirect method
What are the two methods for preparing cash flow statements?
Direct and indirect methods
How do the direct and indirect methods differ?
Direct lists cash flows; indirect adjusts net income
Which section differs between the two methods?
Operating activities
How is net cash from operating activities calculated (indirect method)?
Net income + non-cash expenses + working capital changes
Why can a business be profitable but have negative cash flow?
High receivables, large investments, or loan repayments
What does positive operating cash flow indicate?
Business generates enough cash for operations
What does negative investing cash flow indicate?
Business is buying assets, likely expanding
What does negative financing cash flow indicate?
Loan repayments or dividend payments
Why can profits be high but cash flow low?
Cash tied up in receivables/inventory
Why is cash flow important to investors?
Shows liquidity and ability to fund growth.
How can a business improve cash flow?
Faster collections, expense control, delayed payments
What signals financial distress in cash flow?
Negative operating cash flow over time
What is free cash flow?
Cash left after capital expenses
How do working capital changes affect cash flow?
→ More receivables/inventory → lower cash flow.
