Chapter 6 - Measuring & Reporting Cash Flows Flashcards
1
Q
What is the definition of cash and cash equivalents?
A
- Cash: notes and coins in hand and deposits an banks and other institutions that are accessible to the business on demand
- Cash equivalents: short-term, highly liquid investment (can readily be converted to known amounts of cash), without significant risk of changes in value.
2
Q
What is the standard layout of the cash flow statement?
A
- Cash flows from operating activities. Normal day-to-day trading activities. Interest paid is displayed here most commonly.
- Cash flows form investing activities. Relate to acquisition/disposal of non-current assets.
- Cash flows from financing activities. Relates to the long-term financing of the business. Dividends appear here in Sweden.
- Net increase/decrease: The total when the three categories are added together.
3
Q
What is the typical direction of cash flows in the three categories?
A
- Operating activities: positive
- Investing activities: negative, non-current assets wear out/become obsolete and need to be replaced
- Financing activities: depends on current strategy. Expanding = positive
4
Q
How does the direct method derive cash flows from operating activities?
A
The cash records for the period are analysed, to identify all payments and receipts that relate to operating activities.
5
Q
How does the indirect method derive cash flows from operating activities?
A
The information from the income statement is used as a starting point. From the profit figure, there are two adjustments that are made.
- Adjustment 1: handles non-cash flow related items and items not related to operating activities, such as depreciation and realised gains.
- Adjustment 2: handles changes in working capital (trade payable, trade receivable, inventory). Current assets/liabilities related to operations.
6
Q
What does the cash flow statement tell us?
A
How the business has generated cash during a period and how that cash was used.
