Week 2: IAS1 and IAS7 Cashflow Statement Flashcards
What are the four main financial statements?
1) Statement of Financial Position
2) Statement of Income
3) Statement of Changes in Equity
4) Statement of Cash Flows
Why are is a statement of cashflows needed? (2 reasons)
1) The survival of a company depends not so much on profit earned but, on its liquidity, and therefore its ability to generate cash flows.
2) The company needs cash to pay suppliers, wages, interest and to reinvest in the business.
What are three reasons for cashflow problems?
1) Profits may not convert to cash for several reasons e.g., bad debts, build up of inventories, not arranging good credit facilities with suppliers etc.
2) Purchase of non-current assets has immediate ‘cash’ liquidity impact but filters through the income statement gradually in form of depreciation.
3) Repayment of a loan takes cash out of the business but has no direct effect on profit
Define the cashflow statement?
The cashflow statement is a financial statement that aggregates a company’s cash inflows and outflows from operations, investing, and financing over a set period of time.
what is the objective of cashflow statement?
The objective of a cashflow statement ‘Requires the provision of information about the historical changes in cash and cash equivalents of an entity which classifies cash flows during the period into operating, investing and financing activities’
‘To provide users with an evaluation of an entity’s ability ‘to generate cash’ and of its needs to ‘utilize’ those cash flows’.
What is the direct mehtod of making a cashflow statement?
Direct cash flow identifies changes in cash receipts and payments reported in a cash flow statement. This is less popular as you have to have detailed business records of cash payments and receipts.
What is the indirect methiod of making a cashflow statement?
Indirect cash flow takes the net income and adds or subtracts changes in non-cash transactions to determine an implied cash flow. This is the most popular method as financial statements are published.
What does the indirect method of the cash flow statement translate?
It translates net profit from the accrual method to the cash method in the operating section.
What is the starting point of the indirect method for a cashflow statement?
Net income is the starting point of the indirect method for a cashflow statement
What adjustments are made in the indirect method for accrual impacts when making a cashflow statement indirectly?
Adjustments for accrual impacts on profits include changes in expenses and income during the reporting period.
What non-cash adjustments are included in the indirect method when making a cashflow statement?
Depreciation, amortization, and profit or loss on the sale of non-current assets (NCA).
Q: How are interest and taxes handled in the indirect method for the cashflow statement?
A: Adjustments are made for actual interest and taxes paid.
What balance sheet items influence the adjustments in the indirect method for the cashflow statement?
Increases and decreases in balance sheet line items such as accounts receivable, accounts payable, and inventory.
What are the five steps for creating a cashflow statement from the indirect method?
the five steps for creating a cashflow statement from the indirect method:
- Calculate Net (Decrease)/Increase in Cash and Cash Equivalents
- Calculate Operating Cash Flow. This is the adjustment for non-cash transactions like depreciation and loss/profit on sales of assers
- Calculate Change in Working capital Accounts, Inventory, trade receivables, and trade payables.
- Calculate Interest Paid which comes after cash generate after operations.
- Calculate Tax Paid comes after cash generate after operations.
- Calculate Cash generated or used in Investing Activities
- Calculate Cash generated or used in Financing Activities
- Calculate Cash generated or used in Financing Activities – Dividends
- Reconcile to Change in Cash and Cash Equivalents
What are the direct method advantages when making a cashflow statement?
The Advantages of teh direct method of making a cashflow statement is:
Simple and more accurate
Better Insights
