Cash Flow Statements

Question 1

Why are cash flow statements an important statement to prepare in addition to the Profit & Loss statement?

Answer 1

Revenues and Expenses can be different to cash inflows and cash outflows due to timing issues and accrual accounting estimations. Cash is a physical asset that is used by a business to pay suppliers, employees, the bank, and shareholders dividends. It is important to keep track of cash flows to manage these aspects of a business.

Question 2

What are the three sections of a cash flow statement?

Answer 2

Operating Cash Flows, Investing Cash Flows, Financing Cash Flows

Question 3

How can you know whether a cash flow should be classified as an Operating, Investing or Financing cash flow?

Answer 3

Operating cash flows normally relate to changes in current assets and current liabilities.
Investing cash flows normally relate to changes in Non-current assets.
Financing cash flows normally relate to changes in Non-current liabilities and Equity.

Question 4

What are the two methods available to prepare the Operating Cash flow section?

Answer 4

The ‘Direct method’, and the ‘Indirect Method’.

Question 5

Which method does AASB 107 recommend to use in the preparation of a cash flow statement?

Answer 5

It is recommended to use the Direct Method, and provide a reconciliation using the Indirect Method

Question 6

How to use direct method to find Net Cash flow from operations

Answer 6

Cash Revenue - Expenses
= Income Before Income Taxes - Cash Payment for Income Taxes
= Net Cash Flow From Operating Activities

Question 7

Indirect method formula

Answer 7

Cash flow= Net Profit +/- Non-cash transactions