Chapter 5 Cash Flows Flashcards
What is the cash flow’s statement?
The cash flow statement is the financial statement that summarises the cash inflows and outflows of a business during a given period of time. It is basically an analysis of the business’s cash (and cash equivalents) movements for the period.
What is the importance of the statement of cash flows?
The statement of cash flows provides information to decision makers to:
1. evaluate the entity’s financial structure and ability to meet its obligations.
2. understand where money is coming from and where it is being spent; it also alerts you to know a cash flow problem may be coming.
The cash flow information is an essential input for economic decision models.
Cash flows should be relevant to all user groups, and especially to creditors of the business.
What is the purpose of the cash flow statement
The cash flow statement provides information about cash inflows and outflows of an entity during the period of time classified by operating, investing and financing activities.
What is the standard layout of the statement of cash flows?
Add
What are cash flows from operating activities?
•These represent the cash inflows and outflows arising from normal day-to-day trading activities.
•The cash inflows from operating activities are the amounts received from trade receivables (credit customers settling their accounts) and from cash sales for the period.
•The cash outflows from operating activities are the amounts paid for inventories, operating expenses (such as rent and wages), corporation tax, interest and dividends.
What are cash flows from investing activities?
Money they gained or lost by INVESTING in the business (money from investment)
• These include cash outflows to buy / acquire non-current assets and cash inflows from their disposal.
•Cash flows from investing activities are an indication of the expansion or
downsizing of operating capacity.
• Examples:
-Cash payments for newly acquired equipment
-Cash payments for new investments
-Cash receipts from the disposal of a building
-Cash receipts from sale of shares
What are cash flows from financing activities
Money they use to FINANCE the business
Financing cash flows typically include cash flows associated with borrowing and repaying bank loans and issuing and buying back shares. The payment of dividends to shareholders is also treated as a financing cash flow.
- Which one of the following is the correct definition of the profit, or loss, for a period?
a) The difference between Income and Expenses
b) The difference between Income and Payments
c) The difference between Receipts and Payments
d) The difference between Receipts and Expenses
a) The difference between Income and Expenses
Revenue is:
a The amount received from borrowing
b) The amount of cash received from sales
c) The amount of cash received from sales and the disposals of fixed assets
d) The amount of sales that have been made during a period
D) The amount of sales that have been made during a period
- A business begins the year with opening inventories of 14,560. During the year it purchases goods for 73,820 and sells goods for 89,630. The business makes a unifi gross profit of 20 per cent on sales. What is the closing inventories figure for th year?
a) 12,444
b) 19,176
c) 2,116
d) 16,676
d) 16,676
- Platt Co reported the following:
Sales revenue for the current year of £306,000
- Opening inventories £140,000.
Gross profit for the year £116,000.
- Purchases for the year were 74 percent of the cost of goods sold figure
What were the closing inventories for the current year?
a 80,600
b) 90,600
c) 90,000
d) 60,900
b) 90.600
306000 - 116000 = 190000
74% of 190000 = 190,000 x 0.74 = 140600
190,000 - 140,000 - 140,600 = closing inventory
- The calculation of operating profit may include three of the following four expenses. Which is the one that is not included?
a) Rent expense
b) Depreciation expense
c) Insurance expense
d) Interest expense
D) Interest expense
- ABC Co reported sales revenue for the current year of €450,000. Opening inventories were £90,000 and closing inventories were £130,000. The gross profit for the period was 40 per cent of sales revenue.
What were the purchases during the current year?
a) 220,000
b) 230,000
c) 310,000
d) 140,000
- The following information relates to the activities of TAAH Retailers for the year ended
30 April 2017:
- Gross profit was £ 28,050
- Salaries and wages for the year £ 10,400
Rent and rates expenses were £ 5,000
- Depreciation expense was £ 1,500
What amount of operating profit will be reported on an income statement for the year ended
30 April 2017?
a) £ 28,050
b) £ 11,150
c) £ 12.650
d) £16,150
- Enterprise Co. began trading on 1 January and, after only eight months’ trading, a fire in one of its two warehouses destroyed all the inventories being held there. The owner of the business reported that sales revenue and purchases to the date of the fire were £180,000 and £160,000 respectively. Furthermore, there were still £40,000 of inventories held in the second warehouse that were not affected by the fire. The business makes a constant gross profit margin of 40 percent on its sales.
What is the value of the inventories destroyed by the fire?
a) £ 48,000
b) £ 40,000
c) £ 32,000
d) £ 12,000
What is the cost of goods sold equation
