Chapter 16 Flashcards
What is net cash flow?
All cash received by a company in a period less all cash paid out
How is profit different to cash?
Profit is the result of recording all transactions relating to a period, regardless if cash has been received/paid.
Why is a statement of cash flow important?
It ascertains the going confer status of a company. Without cash credit suppliers and other amounts owing cannot be paid and a company may be wound up. Users of the FS need to see if the business has a positive cash flow
What are the benefits of a statement of cash flows?
They are factual/objective - there are no estimates
Easily understood by users who can see how cash is raised and spent.
What are cash flows from operating activities?
The principal revenue producing activities of the business, including day to day trading.
What are cash flows from investing activities?
The cash flows associated with the purchase and sale of NCA and income from investments held.
What are cash flows from financing activities?
The cash flows associated with the long term financing of a company. I.e share capital and loan stock, as well as dividend paid.
What are cash equivalents?
Liquid assets with a maturity date less than 3 months.
How is net cash flow calculated?
The change in cash between two periods. This figure should reconcile to the difference between the b/f and c/f SFP figure for cash.
How are overdrafts treated on a statement of cash flows?
Overdrafts are repayable on demand and is treated as a negative cash balance.
What are the 3 steps to find the cash flow generated from the company’s operations?
- Adjust profit before tax to arrive at operating profit
- Remove any non-cash flows affecting profit
- Adjust for the effect of movements in working capital (payables, receivables and inventory)
