Lecture 9

Question 1

What is a cash flow statement?

Answer 1

A cash based financial statement (unlike accrual based income statement and balance sheet)
Shows movement of cash, not just profits

Question 2

Why does the cash flow statement matter?

Answer 2

profitable businesses can still run out of cash
It’s essential for paying bills and staff, seizing opportunities, maintaining creditworthiness

Question 3

Cash flow doesn’t equal profit

Answer 3

Question 4

What are the three sections of a cash flow statement?

Answer 4

1. Operating activities - core business operations
   - net profit before
   - adjust for non cash items
   - adjust for changes in working capital
2. Investing activities
   - buying/ selling fixed assets
3. Financing activities
   - capital injections, withdrawals, loans issued/paid

Question 5

What are the two methods to calculate cash flow?

Answer 5

Direct method and indirect method

Question 6

What’s the direct method?

Answer 6

Cash = opening capital, cash from sales (cash paid for inventory, operating expenses, fixed asset purchase purchase, drawings)

Question 7

What’s the indirect method?

Answer 7

Cash = net profit, depreciation (+- working capital changes, +- financing activities)

Question 8

What’s the primary difference between income statement and cash flow statement? 

Answer 8

Income is accrual based, cash blower is cash based

Question 9

Give one reason my profit does not equal cash 

Answer 9

Credit sales increase profit but do not bring an immediate cash 

Question 10

What are the three sections of cash flow statement? 

Answer 10

Operating, investing, and financing activities 

Question 11

What is added back into profit in the indirect method? 

Answer 11

Depreciation (a non-cash expense) 

Question 12

What effect does an increase in receivables have on cash flow? 

Answer 12

Negative – cash not yet received 

Question 13

What’s the formula for cash in the direct method? 

Answer 13

Cash = inflows - outflows

Question 14

Why is an increase in creditor positive for cash flow? 

Answer 14

Payment is delayed so more cash is retained

Question 15

What is considered a financing activity in cash flow statement? 

Answer 15

Capital injection or loan repayment 

Question 16

What does depreciation do to profit and cash? 

Answer 16

Reduces profit, no effect on cash 

Question 17

Is buying inventory for cash shown in cash flow 

Answer 17

Yes, as a cash outflow under operating activities