Lecture 3: Statement of profit and loss & cash-flow Flashcards
(20 cards)
What is the purpose of the Statement of Profit or Loss?
It reconciles income and expenses to determine the correct period profit using the accrual principle. It shows profitability and identifies a company’s success.
What principles does the Statement of Profit or Loss apply?
Accrual Principle: Match income and expenses to the period they belong to.
Matching Principle: Recognize expenses in the same period as related revenues.
What does the Statement of Profit or Loss compile?
Inflows and outflows of money, goods, and services.
What is the definition of the Profit and Loss Account?
It reflects the income generated by a company.
What is the Total Cost Method?
Shows total costs by expense type (e.g., depreciation, materials).
Does not show costs by function (e.g., production, R&D).
What is the COGS Method (Cost of Goods Sold)?
Calculates gross profit, useful for production companies.
Lacks breakdown of total expenses like personnel or depreciation.
What is the core principle of IFRS 15 for revenue recognition?
Revenue is recognized when control is transferred to the customer, at the amount the company expects to receive.
What model does IFRS 15 introduce?
A 5-step model for determining when and how much revenue to recognize.
What does IFRS stand for?
International Financial Reporting Standards
What are the benefits of using IFRS for multinational companies?
Easier to consolidate international operations
Attracts global investors
Reduces costs of maintaining multiple accounting standards
Which are the 5 steps in the IFRS model?
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
What is the purpose of the Cash Flow Statement?
It shows actual cash inflows and outflows, which is important because profit ≠ cash.
Why is the statement of cash flows important to investors?
Because “cash is king” – profit does not guarantee liquidity.
What are the three main types of cash flows?
Operating Activities
Investing Activities
Financing Activities
What are the two methods for calculating Cash Flow from Operating Activities?
Direct Method: Lists actual cash inflows/outflows.
Indirect Method: Adjusts profit for non-cash items and changes in working capital.
What is included in Cash Flow from Investing Activities?
Cash related to buying/selling fixed assets, investments, etc.
What is included in Cash Flow from Financing Activities?
Cash from debt, equity financing, and dividends paid.
What is Free Cash Flow?
It is the cash left after operating and investing activities, available for financing or dividends.
Is the rule “Cash Flow = Profit + Depreciation” always true?
No – it’s a simplified rule of thumb, not always accurate.
Can cash flow be manipulated?
Yes, cash flow can be managed or manipulated, e.g., via special lease conditions.
