Week 7

Question 1

The purpose of the

statement of cash flows

Answer 1

The statement of cash flows:
• evaluate the entity’s financial structure, including its liquidity and
solvency
• assess the entity’s ability to generate cash in the future and enable
predictions of future cash flows to be made
• check the accuracy of past assessments of future cash flows, and
• examine the relationship between profitability and net cash flow
• Cash is the life-blood of any business and without it survival is very
unlikely

Question 2

2 methods

Answer 2

Direct method

Indirect method

Question 3

Direct Method

Answer 3

Determines the gross and net cash flows from operating,
investing and financing activities in relation to the
opening and closing cash at bank balance

Question 4

Indirect Method

Answer 4

Reconciles the operating profit to the cash flow from
operating activities by examining the increase and
decreases in current assets and liabilities

Question 5

Direct and indirect method

Answer 5

Both the indirect and direct methods will yield the same net cash flows
from operating activities.

AASB 107 permits either the direct or the indirect method but
‘encourages’ the direct method.

When using the direct method a reconciliation of cash flows from
operations to profits is required.

Question 6

Statement of cash flows- 3 Sections

Answer 6

Operating activities

Investing Activities

Financing Activities

Question 7

Operating activities

Answer 7

inflows from customers and
outflows to suppliers of all goods and services, with
payments of tax and interest received and paid
shown separately

Question 8

Investing Activities

Answer 8

outflows from purchasing noncurrent
assets and inflows if non-current assets are
sold

Question 9

Financing Activities

Answer 9

inflows from long term
borrowing or capital contributions by owners, and
outflows from loan repayments and withdrawals by
owners

Question 10

The basic structure of the statement

Answer 10

+/- Cash flows provided (used) by operating activities
+/- Cash flows provided (used) by investing activities
+/- Cash flows provided (used) by financing activities

– Net increase (decrease) in cash
+ Cash, beginning of year

– Cash, end of year

Question 11

Analysis of cash and other records

Answer 11

Step 1: Ascertain net cash provided from operating activities
Step 2: Ascertain net cash provided from investing activities
Step 3: Ascertain net cash provided from financing activities
Step 4: Ascertain net cash increase (decrease) for the year
Step 5: Reconcile cash at end of year with
beginning of year

Question 12

Preparing the statement of cash flows

Answer 12

In order to explain a company’s change in cash, you must explain the
changes in the company’s non-cash accounts. To do that, you need the
following items:
• a comparative statement of financial position (balance sheet)
• an statement of comprehensive income (income statement)
• additional information on changes in account balances

Question 13

Reporting cash flows from operating

activities: direct method

Answer 13

• When reporting operating cash flows under the direct method,
companies calculate and report cash receipts from operating activities
and cash payments for operating activities.
• Cash receipts are calculated by converting revenues from the income
statement to cash collections.
• Cash payments are calculated by converting expenses from the
income statement to cash payments.

Question 14

Cash receipts from customers

Answer 14

2 Photos in favourites 8/9/18

Question 15

Cash paid to suppliers

Answer 15

2 Photos in favourites 8/9/18

Question 16

Cash paid for insurance

Answer 16

Photo in favourites 8/9/18

Question 17

Cash paid for wages

Answer 17

Photo in favourites 8/9/18

Question 18

Adjustments for gains and losses from

investing and financing activities

Answer 18

• Profit may include a gain or loss arising from an investing or financing
activity e.g. a loss from the sale of equipment or a gain from the early
retirement of debt.
• The entire cash inflow associated with the transaction will be reported
as either an investing or financing cash flow.
• The effect of the gain or loss must be removed from net income so
that operating cash flows are not affected by the transaction.

Question 19

Calculate the amount of cash paid to suppliers of

services (including employees) during 2017.

Answer 19

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Question 20

Calculating cash flows from investing activities

Answer 20

• To calculate cash flows from investing activities, all changes in noncurrent
assets must be examined.
• In general, an increase in a non-current asset suggests a purchase
and therefore a cash outflow.
• A decrease suggests a sale and therefore a cash inflow.

Question 21

Types of investing inflows of cash

Answer 21

• Cash flows from investing activities include cash inflows from the sale
of property, plant and equipment (PPE), and the sale of securities
(shares and bonds) of other companies
• Cash outflows include the purchase of PPE, and the purchase of
shares

Question 22

Calculating cash flows from financing activities

Answer 22

• To calculate cash flows from financing activities, the balances for
non-current liabilities, equity accounts and dividends must be
examined.
• In general, an increase in a liability or an equity account suggests a
cash inflow.
• A decrease in a liability suggests a cash outflow from payments to
creditors.

Question 23

Analysing a company’s statement of cash flow

Answer 23

• The statement of cash flows can be used to answer many questions
about a company’s cash.
• Two of the broader questions that can be addressed are as follows:
✓ Is the company able to generate enough cash to grow? And
✓ Is the company able to satisfy its obligations?

Question 24

Analysing a company’s statement of cash flow 2

Answer 24

• explain the changes to cash and cash equivalents
• explain the effect of operating activities on cash
• explain the effect of financing and investing
activities
• comparison to position in prior periods