Week 4 - Cash Flow Statement

Question 1

What is a Cash Flow Statement?

Answer 1

• summarises all Movements of Cash Into and Out of a Business during the accounting Period

Question 2

What is Cash Equivalent?

Answer 2

Short Term, Highly Liquid Assets that can be Quickly and Easily Converted Into Cash

Question 3

What are the 3 Types of Cash Inflow and Outflows (types of activities)

Answer 3

OPERATING ACTIVITIES - income statement items
INVESTING ACTIVITIES - changes in investments and non-current assets
FINANCING ACTIVITIES - changes in non-current liabilities and equity

Question 4

Example of the Cash Inflows and Outflows for Operating Activities (2,3)

Answer 4

Inflows :
- Sale of Goods/Services
- Interest & Dividends Received
Outflows :
- Suppliers for Inventory
- Employees for Services
- Lenders for Interest

Question 5

Example of the Cash Inflows and Outflows for Investing Activities (3,3)

Answer 5

Inflows :
- Sale of Property, Plant and Equipment
- Sale of Investment in Debt and Equity Services of Other Entities
- Collection of Principal on Loans to Other Entities
Outflows :
- Purchase Property, Plant and Equipment
- Purchase Investments in Debt etc
- Make Loans to Other Entities

Question 6

Example of the Cash Inflows and Outflows for Financing Activities (2,2)

Answer 6

Inflows :
- Sale of Ordinary Shares
- Issuance of Long-Term Debt
Outflows :
- Shareholders as Dividends
- Redeem Long Term Debt or Reacquire Ordinary Shares

Question 7

What are the 2 Methods of Operating Activities

Answer 7

• DIRECT METHOD
• INDIRECT METHOD

Question 8

Explain the Method of Operating Activity - DIRECT METHOD

Answer 8

• Only Show Cash Movements
• Works out Net Cash Flow from Operating Activities by Directly Showing the Cash-Only Transactions
  e.g. cash received from sales

Question 9

Explain the Method of Operating Activity - INDIRECT METHOD

Answer 9

• Start of the Profit and Adjust for Any Non-Cash Movements
• Takes Net Profit from Income Statemen, then Adjusts for all Non-Cash Transaction to Get the Net Cash Flow from Operating Activities

Question 10

How is Inventory, Trade Receivables, Trade Payable INCREASING affect Net Cash?

Answer 10

Inventory - Deduct
Trade Receivables - Deduct
Trade Payable - Add

Question 11

How is Inventory, Trade Receivables, Trade Payable DECREASING affect Net Cash?

Answer 11

Inventory - Add
Trade Receivables - Add
Trade Payable - Deduct

Question 12

OA - Explain how Depreciation Expense affects Net Income and Cash?

Answer 12

• Reduces Net Income
• Doesn’t Reduce Cash

Question 13

OA - Explain how Loss on Sale of Equipment affects Net Income

Answer 13

• any LOSS on Sale is ADDED to NET INCOME in the OPERATING SECTION
• any GAIN on SALE is DEDUCTED from NET INCOME in OPERATING SECTION
• proceeds of Sale are then Showing in Investing Activities

Question 14

OA - Explain the Change to Non-Cash CL Accounts when Accounts Payable Increase and Income Tax Payable Decreases

Answer 14

When ACCOUNTS PAYABLE INCREASES
- Company Received More in Goods Than Actually Paid for
- Increase is Added to Net Income
When INCOME TAX PAYABLE DECREASES
- Income Tax Expense was Less than the Amount of Taxes Paid during the Period
- Decrease is Subtracted from Net Income

Question 15

Why it is important for a company to be aware of their cash flow position?

Answer 15

• Cash is a Very Important Element of Most Businesses
• they Need Cash to be Able to Trade on a Day-to-Day basis, e.g. to pay trade suppliers
• If they Don’t, they May Experience a Slowdown of the Business as they Would be Unable to Trade and Purchase Materials