Week 8

Question 1

What is the purpose of a Statement of Cash Flows?

Answer 1

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

Question 2

Why is Cashflow information useful?

Answer 2

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.

Question 3

Operating Activities are:

Answer 3

the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.

Question 4

Investing Activities are:

Answer 4

the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Question 5

Financing Activiites are:

Answer 5

activities that result in changes in the size and composition of the contributed capital and borrowings of the entity.

Question 6

When an entity is in expansion, what are its cash flow?

Answer 6

1. Operating cash flows positive
2. Investing large and negative
3. Financing large and positive

Question 7

When an entity is in consolidation, what are its cash flow?

Answer 7

1. Operating cash flows positive
2. Investing small negative or positive
3. Financing negative.

Question 8

If cash flows are as follows, as business is in_____________

1. Operating cash flows positive
2. Investing small negative or positive
3. Financing negative.

Answer 8

Consolidation

Question 9

If cash flows are as follows, as business is in_____________

1. Operating cash flows positive
2. Investing large and negative
3. Financing large and positive

Answer 9

Expansion

Question 10

Negative cash flows from operations

Answer 10

1. Common in start-up

2. Otherwise are not a good sign

Question 11

What cash flows are not a goods sign?

Answer 11

Negative cash flows from operations

Question 12

What are cashflow warning signs?

Answer 12

1. Cash received less than cash paid
2. Operating outflow
3. Cash receipts from customers being less than cash payments to suppliers and employees
4. Cash from operating activities being lower than operating profit after tax
5. Proceeds of share capital being used to finance operating activities
6. Consistent inflows from investing activities
7. Proceeds from borrowing continually much greater than the repayment of borrowing

Question 13

Operating Activities - Positive Cashflows

Answer 13

Good

Question 14

Operating Activities - Negative Cashflows

Answer 14

1. Okay in start-up

2. Otherwise are not a good sign

Question 15

Investing Activities - Positive Cashflows

Answer 15

1. Okay if NC assets not needed

2. Bad if selling NC assets to cover up -ve operating CF

Question 16

Investing Activities - Negative Cashflows

Answer 16

1. Okay if investing in NC assets that will provide a good return and increase operating CF

Question 17

Financing Activities - Positive Cashflows

Answer 17

1. Okay if issuing shares or borrowing to invest

2. Not good if being used to cover up -ve operating CF

Question 18

FinancingActivities - Negative Cashflows

Answer 18

1. Good as repaying loans or paying dividends

Question 19

What are prepaid expenses - what do O/B and C/B represent?

Answer 19

1. Opening prepaid expenses – paid in cash in the previous year
2. Closing prepaid expenses – paid in cash in the current year

Question 20

What are accrued expenses - what do O/B and C/B represent?

Answer 20

1. Opening accrued expenses – paid in cash in the current year
2. Closing accrued expenses – will be paid in cash in the following year

Question 21

Expansion is indicated by:

Answer 21

– Operating CF positive (inflow)
– Investing CF large and negative (outflow)
– Financing CF large and positive (to fund expansion)

Question 22

Consoldiation is indicated by:

Answer 22

– Operating CF positive
– Investing CF small (either positive or negative)
– Financing CF negative