Week 3 - Cash vs Profit & Cash Flow Statements

Question 1

What is the difference between cash and profit?

Answer 1

• Cash is actual money which can be deposited in the bank and is accessible to the business on demand
• Profit is a result of revenues less expenses

Question 2

What is the impact on profit and cash flow when a customer buys goods for £50,000 on 60 days credit?

Answer 2

• Profit - sale of £50,000 recognised immediately
• Cash flow - cash inflow of £50,000 when the customer actually pays

Question 3

What is the impact on cash flow and profit when there is depreciation charge of £100,000 to reflect the use of factory non-current assets? (2)

Answer 3

• Profit - depreciation of £100,000 included as a cost
• Cash flow - No effect on cash flow

Question 4

What is a cash flow statement?

Answer 4

Is a statement of cash receipts & payments shows the movements of cash resources during a particular accounting period

Question 5

What are cash equivalents? (3)

Answer 5

• Short term highly liquid investments
• Readily convertible to known amount of cash
• Insignificant risk of change in value

Question 6

What is the purpose of the statement of cash flows? (4)

Answer 6

• Predict future cash flows
• Evaulate management decisions
• Determine the ability to pay dividend to shareholders’ and payments to creditors
• Show the relationship of net income to the business’ cash flows

Question 7

3 components of cash flow statements

Answer 7

• Operating activities
• Investing activities
• Financing activities

Question 8

What are operating activities? (2)

Answer 8

• These are the activities involved in earning revenues and reflect day-to-day operations that determine the future of the organisation
• E.g. The purchase or manufacturing of merchandise and the sale of merchandise including marketing administration

Question 9

What are investing activities?

Answer 9

• Are changes in non-current assets and investments
• Purchase of fixed assets
• Sale of non-current assets

Question 10

What are financing activities? (4)

Answer 10

• Changes in non-current liabilities and equity
• Insurance of equity
• Payments of dividends
• Capital/finance lease payments

Question 11

Potential Cash flows from operating activities (2 inflows & 5 outflows)

Answer 11

Inflows:

• Sales to customers
• Interest and dividends

outflows:

• Suppliers of merchandise and services
• Employees
• Leaders for interest
• Government for taxes
• Interest and dividends paid

Question 12

Potential cash flows from investing activities (2 inflows and 3 outflows)

Answer 12

• *Inflows:**
• Selling investments and plant assets
• Collecting of principal on loans

Outflows:

• Payments to acquire investments and plant assets
• Purchase debt or equity investments
• Make loans

Question 13

Potential cash flows from financing activities (2 inflows 2 outflows)

Answer 13

Inflows:

• Borrowing
• Owners (for example, from issuing shares)

Outflows:

• Repayments of borrowed funds
• Owners for dividends

Question 14

Where do we look for operating, Investing and financing activities on cash flows and SoFP?

Answer 14

• Operating cash flows > current assets, current liabilities
• Investing cash flows > long-term assets
• Financing cash flows > long-term liabilities, owners’ equity

Question 15

3 basic adjustments of the indirect method

Answer 15

• Add back depreciation expense
• Add back loses and subtract gains associated with sale of investments or property and equipment
• Adjust for changes in current assets and current liabilities associated with operations

Question 16

Changes in current assets and the impact on cash (2)

Answer 16

• Increase in current assets = decrease in cash
• Decrease in current assets = increase in cash

Question 17

Impact of a change in current liability on cash (2)

Answer 17

• Increase in current liabilities means an increase in cash
• Decrease in current liability means a decrease in cash

Question 18

Formula for written down value

Answer 18

Written down value = cost - depreciation