Week 8 Flashcards
What is the purpose of a Statement of Cash Flows?
A Statement of Cash Flows, when used in conjunction with the rest of the financial report, provides information that enables users to evaluate the changes in:
1. net assets of an entity,
2. its financial structure (including its liquidity and solvency)
3. its ability to affect the amounts and timing of cash flows
… in order to adapt to changing circumstances and opportunities
Why is Cashflow information useful?
Cash flow information is useful:
1. in assessing the ability of the entity to generate cash and cash equivalents
2. enables users to develop models to assess and compare the present value of the future cash
flows of different entities.
3. enhances the comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting
treatments for the same transactions and events.
Operating Activities are:
the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.
Investing Activities are:
the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
Financing Activiites are:
activities that result in changes in the size and composition of the contributed capital and borrowings of the entity.
When an entity is in expansion, what are its cash flow?
- Operating cash flows positive
- Investing large and negative
- Financing large and positive
When an entity is in consolidation, what are its cash flow?
- Operating cash flows positive
- Investing small negative or positive
- Financing negative.
If cash flows are as follows, as business is in_____________
- Operating cash flows positive
- Investing small negative or positive
- Financing negative.
Consolidation
If cash flows are as follows, as business is in_____________
- Operating cash flows positive
- Investing large and negative
- Financing large and positive
Expansion
Negative cash flows from operations
- Common in start-up
2. Otherwise are not a good sign
What cash flows are not a goods sign?
Negative cash flows from operations
What are cashflow warning signs?
- Cash received less than cash paid
- Operating outflow
- Cash receipts from customers being less than cash payments to suppliers and employees
- Cash from operating activities being lower than operating profit after tax
- Proceeds of share capital being used to finance operating activities
- Consistent inflows from investing activities
- Proceeds from borrowing continually much greater than the repayment of borrowing
Operating Activities - Positive Cashflows
Good
Operating Activities - Negative Cashflows
- Okay in start-up
2. Otherwise are not a good sign
Investing Activities - Positive Cashflows
- Okay if NC assets not needed
2. Bad if selling NC assets to cover up -ve operating CF
Investing Activities - Negative Cashflows
- Okay if investing in NC assets that will provide a good return and increase operating CF
Financing Activities - Positive Cashflows
- Okay if issuing shares or borrowing to invest
2. Not good if being used to cover up -ve operating CF
FinancingActivities - Negative Cashflows
- Good as repaying loans or paying dividends
What are prepaid expenses - what do O/B and C/B represent?
- Opening prepaid expenses – paid in cash in the previous year
- Closing prepaid expenses – paid in cash in the current year
What are accrued expenses - what do O/B and C/B represent?
- Opening accrued expenses – paid in cash in the current year
- Closing accrued expenses – will be paid in cash in the following year
Expansion is indicated by:
– Operating CF positive (inflow)
– Investing CF large and negative (outflow)
– Financing CF large and positive (to fund expansion)
Consoldiation is indicated by:
– Operating CF positive
– Investing CF small (either positive or negative)
– Financing CF negative
