Wk 4 Cash Flow Statement Flashcards
What does a statement of cash flow do?
Summarises all movements of cash (and cash equivalents) in/out of a business over a period of time
What can a cash flow be used for?
To understand if the business has enough money in order to keep operating
What is a cash equivalent?
Short-term, highly liquid assets which can be quickly and easily converted into cash (e.g. current bank accounts, short term investments/securities), can be converted into cash within 3 months
What are the different categories of cash movements?
Operating activities, investing activities, and financing activities
How is a cashflow statement presented?
Start with operating, move to investing, then financing = net increase.decrease in cash/cash equivalents over the period
What are operating activities?
Trading activities, must consider cash inflow/outflow (e.g inflow from sales, outflow from expenses)
What are investing activities?
Changes in investments/non-current assets (e.g. inflow from PPE (property, land, and equipment), selling an asset, outflow from PPE (purchasing some))
What are financing expenses?
Resources of the business, sales of shares, outflow to shareholders as dividends, or to redeem long-term debt of reacquire ordinary shares
What are the 2 methods for operating activities?
- direct (only showing cash movements, works out net cash flow by showing cash-only transactions
- indirect (start from the profit and adjust for any non-cash movements to get the net cash flow from operating activities)
What is the indirect method for operating activities?
Convert profit into cash - > start with operating profit
cancel non-cash transactions (e.g. depreciation)
calculate changes in working capital (current assets - current liabilities)
other cash paid during the year (e.g. interest/tax)
= net cash from operations
How is loss on sale of equipment presented?
Loss is added to net profit in operating section, any gain on sale is deduced - proceeds of the sale are then showing in investing activities
Where is a decrease in accounts receivable moved to?
Amount decreased by is added to net profit
What is the affect of an increase in inventory?
Deducted from net profit
What occurs when accounts payable increases?
Company receives more in goods than what has been paid, increase added to net income
What occurs when income tax payable decreases?
Income tax expense less than the amount of taxes paid during the period, decrease subtracted from net income
