Statement of cash flows

Question 1

What is the importance of cash?

Answer 1

. Both cash and profit are required for a viable business model
. They are not the same thing and often they trade-off against each other
. Cash is an objective measure and difficult to manipulate but period profit and asset values are
based,more/less upon subjective opinions

Question 2

What is cash needed for?

Answer 2

. For capital expenditure and acquisitions
. To service finance
. To pay the tax man
. Cash forecasting is vital to predict surpluses and deficits

Question 3

What are the differences between cash and profit?

Answer 3

. Non-cash items are charged to profit
. Cash is needed to pay for investments (balance sheet)
. Expenses are recorded when costs are incurred not when bill is paid
.Sales are recorded when goods are despatched not when money is received
.Cash flows arise from financing activities (balance sheet)

Question 4

What is the standard presentation of the statement of cash flows?

Answer 4

1. Cash flows from operating profits
       plus of minus
2.Cash flows from investing activities
       plus or minus
3. Cash flows from financing activities
       plus or minus
4.Net increase/decrease in cash over the period

Question 5

Explain cash flows from operating profits

Answer 5

represent the cash inflows and outflows arising from normal day-to-day trading activities, e.g. working capital(receivables and payables), depreciation added back from P&L account

Question 6

Explain cash flow from investing activities

Answer 6

outflows to acquire non-current assets and cash inflows from their disposal.

Question 7

Explain cash flows from financing activities

Answer 7

cash inflows and outflows relating to the long-term financing of the business.e.g. loans and loan payments

Question 8

Explain working capital in statement of cash flows

Answer 8

Made up of receivables and payables
. more receivables is bad for cash flows as it means more cash is owed
. more payables is better for cash flows as it means cash doesn’t need to paid yet