week 8 Flashcards
what is the statement of profit and loss
covers all income and expenses during an accounting period
what is the statement of financial position
includes all assets, liabilities and equity capital as at the end of the accounting period
what is the statement of cash flows
sources of cash generation and cash use during an accounting period
reconciles cash balances at the beginning and the end of the accounting period
what is revenue recognition
sales recorded when goods or services are delivered
what is matching
costs/expenses are matched to the sales they contribute towards
what is a statement of cash flows for
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
what is cash
cash on hand and deposits available on demand at a financial institution
what is a cash equivalent
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
why do we need statements of cash flow
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
what are the arguments against statements of cash flows
information is all available in the other statements
some research shows no incremental information from statement of cash flows compared
what are the arguments for statement of cash flows
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
what are the three sections of the statements of cash flows
cash flows from operations
cash flows from investing
cash flows from financing activities
what are the inflows and outflows for operations
inflows - receipts from sale of goods
outflows - pay wages, tax expenses, purchase inventory, pay suppliers
what are the inflows and outflows for capital expenditure
inflows - sale of non-current assets, sale of long term investments
outflows - purchase of non-current assets, purchase long-term investments
what are the inflows and outflows for financing activities
inflows - sales of shares, issue of debentures
outflows - repurchase shares, repay loans
what are operating activities
the principal revenue-producing activities of the entity
along with other activities that are not investing or financing activities
what are cash flows from operating activities
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
what is the direct method
needs information about all transactions
involves summarising movements on cash/bank accounts
revenues collected in cash, expenses paid in cash
what is the indirect method
starts with profit and reconciles to the changes in cash balances
compares opening and closing statements of financial position
which method do you use, direct or indirect
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
why do you use the direct method for net cash flow from operating activities
operating cash flows include receipts, payments, dividends, interest paid, income taxed paid
when you use the indirect method receipts and payments are not separated
how do you use the indirect method of cash flow from operations
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
how does net profit compare to CFO
net profit has
non-cash components
working capital movements
non-operating profit/loss
unequal expense and cash paid of the same item
how do you calculate CFO using the indirect method
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
what are the most common additions to profit before tax for cash flow of operations
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
what are the most common deductions from profit before tax for cash flow of operations
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
what are cash flows from investing activities
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
why is separate disclosure of CFI important
these cash flows show how cash has been used to acquire resources intended to generate future income
what is cash flow from financing activities
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
why is separate disclosure of CFF important
useful in predicting claims on future cash flows by providers of capital
