8 - The Statement of Cash Flows

Question 1

What is the point of a Statement of Cash Flows

Answer 1

Reports the inflows and outflows of cash (and cash equivalents) under headings: operating, investing and financing activities.

Question 2

Why is the statement of cash flows required to be produced?

Answer 2

Because neither the statement of financial position or statement of financial performance do not concentrate sufficiently on liquidity (cash flows).

Question 3

What are cash equivalents?

Answer 3

Represent short-term, highly liquid investments that can readily be converted to a fixed amount of cash

Question 4

Define cash-based accounting

Answer 4

Revenue that is recognised when cash is received and expenses are recognised when cash is paid/

Question 5

Define accrual accounting

Answer 5

Revenue is recognised when it is earned and expenses are recognised when they are incuured.

Question 6

What are the 3 components of the cash flow statement?

Answer 6

1. Operating Activities
2. Investing Activities
3. Financing Activities

Question 7

What is classified as an operating activity?

Answer 7

Your everyday transactions; stuff that is a part of day to day operations.

Represents net inflows from operations, and only cash received and paid, not expenses and revenue, are featured.

Question 8

What is classified as an investing activity?

Answer 8

Concerned with cash payments to acquire additional non-current assets, and cash receipts for disposal of such assets

Question 9

What is classified as a financing activity?

Answer 9

Deals with financing the business excluding short-term credit.

Question 10

Classify: cash received from issue of capital share

Answer 10

Financing

Question 11

Classify: cash received from customers

Answer 11

Operating

Question 12

Classify: purchases of property, plant and equipmrnt

Answer 12

Investing

Question 13

Classify: cash paid to suppliers

Answer 13

Operating

Question 14

Classify: cash paid for dividends to shareholders

Answer 14

Financing

Question 15

Classify: repayment of loan interest

Answer 15

Investing/financing

Question 16

Classify: cash paid to employees

Answer 16

Operating

Question 17

Classify: cash borrowed from the bank

Answer 17

Financing

Question 18

Classify: cash proceeds received from sale of investment in another company

Answer 18

Investing

Question 19

Classify: income taxes paid

Answer 19

Operating

Question 20

Classify: repayment of loan principle

Answer 20

Financing

Question 21

Classify: dividend paid

Answer 21

Financing

Question 22

How to summarise the net cash of each activity if it is a positive number?

Answer 22

‘Provided by’

Question 23

How to summarise the net cash of each activity if it is a negative number?

Answer 23

‘Used in’

Question 24

What are the 2 methods of calculating and reporting the cash flows from operation section of the cash flow statement?

Answer 24

Direct and indirect method

Question 25

What does the Statement of Cash Flows tell us?

Answer 25

Tells us how the business has generated cash during the period and where the cash has gone.

Tracks sources and uses of cash over time, which is indicative of trends and useful for predicting future opportunities and patterns of cash flow.

Identifies non-operational cash flows

Question 26

Benefits of Cash Flow Statement

Answer 26

It explains what causes the movement in cash balance and other items impact by the cash flows.

It helps to measure cash sufficiency and business solvency .

It helps users to evaluation the entity’s ability to generate future cash flows.