Cash flow Statement Flashcards
(16 cards)
What is the purpose of adding depreciation back to profit?
Depreciation reduces profit but does not affect cash, so it is added back to align profits with cash.
How should disposal losses be treated in profit reconciliation?
Disposal losses reduce profit but do not reduce cash, so they should be added back to profits.
How can finance costs be calculated?
Create a T-account to see what was paid to the bank for interest.
What is the significance of tax changes in profit reconciliation?
If HMRC states a different tax amount, it needs to be adjusted in the reconciliation.
What do investing activities refer to?
Investing activities refer to the purchase or sale of assets.
How does inventory affect cash flow?
More inventory at year-end indicates more cash paid, thus reducing cash.
What does an increase in trade receivables indicate?
It means people haven’t paid yet, reducing cash, so it should be subtracted in the reconciliation.
What does a reduction in payables indicate?
It means cash has been paid out, thus reducing cash.
When do limited companies pay tax?
Limited companies pay tax after the year-end.
What is an asset according to the IFRS conceptual framework?
An asset is a present economic resource controlled by the entity as a result of past events.
What is a liability according to the IFRS conceptual framework?
A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
What is equity according to the IFRS conceptual framework?
Equity is a residual interest in the assets of an entity after deducting all its liabilities.
What is income according to the IFRS conceptual framework?
Income is increases in assets or decreases in liabilities that result in an increase of equity, excluding contributions from equity holders.
What are expenses according to the IFRS conceptual framework?
Expenses are decreases in assets or increases in liabilities that result in a decrease of equity, excluding distributions to equity holders.
What are the three criteria for recognizing elements in financial statements?
1) Meets the definition of an element 2) Provides relevant information 3) Can be faithfully represented.
What is materiality in financial reporting?
Materiality is in proportion to company size; e.g., missing £1000 from Tesco’s FS is less impactful than from a corner shop.
