week 8

Question 1

what is the statement of profit and loss

Answer 1

covers all income and expenses during an accounting period

Question 2

what is the statement of financial position

Answer 2

includes all assets, liabilities and equity capital as at the end of the accounting period

Question 3

what is the statement of cash flows

Answer 3

sources of cash generation and cash use during an accounting period
reconciles cash balances at the beginning and the end of the accounting period

Question 4

what is revenue recognition

Answer 4

sales recorded when goods or services are delivered

Question 5

what is matching

Answer 5

costs/expenses are matched to the sales they contribute towards

Question 6

what is a statement of cash flows for

Answer 6

show how the cash and bank balances have changed between last years and this years statements of financial position
it shows how the company has generated and used its cash over the year
it is the third main financial statement

Question 7

what is cash

Answer 7

cash on hand and deposits available on demand at a financial institution

Question 8

what is a cash equivalent

Answer 8

highly liquid investments with short periods to maturity that are readily convertible to cash at the investors option and are subject to an insignificant risk of changes in value
borrowings that are used as part of the cash management of the company
does not include loans which have to be repaid in the short term

Question 9

why do we need statements of cash flow

Answer 9

cash flow information helps to assess the liquidity, viability and financial flexibility of the company
tells users about the company’s ability to pay dividends, interest, repay bank loans and finance investments
poor cash flows can show financial distress
statements of cash flows helps evaluate economic decisions
statements of cash flows is less open to manipulation by managers than accrual based profits

Question 10

what are the arguments against statements of cash flows

Answer 10

information is all available in the other statements
some research shows no incremental information from statement of cash flows compared

Question 11

what are the arguments for statement of cash flows

Answer 11

viewed as more comparable between firms because less scope for choice in applying accounting judgement
users find the idea of cash easy to understand
users like it because it gives a good indication of a company’s solvency
research shows that cash flow disclosures affect shares prices suggesting the statements do provide incremental information

Question 12

what are the three sections of the statements of cash flows

Answer 12

cash flows from operations
cash flows from investing
cash flows from financing activities

Question 13

what are the inflows and outflows for operations

Answer 13

inflows - receipts from sale of goods
outflows - pay wages, tax expenses, purchase inventory, pay suppliers

Question 14

what are the inflows and outflows for capital expenditure

Answer 14

inflows - sale of non-current assets, sale of long term investments
outflows - purchase of non-current assets, purchase long-term investments

Question 15

what are the inflows and outflows for financing activities

Answer 15

inflows - sales of shares, issue of debentures
outflows - repurchase shares, repay loans

Question 16

what are operating activities

Answer 16

the principal revenue-producing activities of the entity
along with other activities that are not investing or financing activities

Question 17

what are cash flows from operating activities

Answer 17

primarily made up of the net increase/decrease in cash that results from a company’s normal trading activities
the figure can be derived using two methods - direct or indirect

Question 18

what is the direct method

Answer 18

needs information about all transactions
involves summarising movements on cash/bank accounts
revenues collected in cash, expenses paid in cash

Question 19

what is the indirect method

Answer 19

starts with profit and reconciles to the changes in cash balances
compares opening and closing statements of financial position

Question 20

which method do you use, direct or indirect

Answer 20

most companies use the indirect method, this information is readily available from information used for the statement of profit and loss and the statement of financial position
IAS 7 prefers the direct method, this requires additional information to be gathered on cash receipts and payments

Question 21

why do you use the direct method for net cash flow from operating activities

Answer 21

operating cash flows include receipts, payments, dividends, interest paid, income taxed paid
when you use the indirect method receipts and payments are not separated

Question 22

how do you use the indirect method of cash flow from operations

Answer 22

begin with net profit before tax - adjust for non-operating items between operating income and net profit before tax, gives operating profit figure
from operating profit, adjust for non-cash expenses such as depreciation and amortisation
adjust for changes in operating working capital - inventories, trade receivables, trade payables
arrives at cash generated from operations
list other operating cash flows such as tax or interest paid

Question 23

how does net profit compare to CFO

Answer 23

net profit has
non-cash components
working capital movements
non-operating profit/loss
unequal expense and cash paid of the same item

Question 24

how do you calculate CFO using the indirect method

Answer 24

adjust the components that are not cash
adjust the working capital movements
adjust non-operating profit/loss
add back the expenses and induct the cash paid that underlies the same item

Question 25

what are the most common additions to profit before tax for cash flow of operations

Answer 25

interest expense
depreciation and amortisation
loss on sale of operating non current assets
decrease in inventory
decrease in receivables
decrease in prepayments
increase in payables
increase in accruals

Question 26

what are the most common deductions from profit before tax for cash flow of operations

Answer 26

profit on sale of operating non-current assets
increase in inventory
increase in receivables
increase in prepayments
decrease in payables
decrease in accruals
interest paid
tax paid

Question 27

what are cash flows from investing activities

Answer 27

purchase and disposal of non-current assets and other investments not included in cash equivalents
these include purchase of property, sales of investments, proceeds from sale of PPE, interest and dividends

Question 28

why is separate disclosure of CFI important

Answer 28

these cash flows show how cash has been used to acquire resources intended to generate future income

Question 29

what is cash flow from financing activities

Answer 29

financing activities result in changes in the size and composition of the contributed equity and borrowings of the entity
includes proceeds from shares, borrowings, dividends and share buybacks

Question 30

why is separate disclosure of CFF important

Answer 30

useful in predicting claims on future cash flows by providers of capital