Week 7 - Cash Flow Statement Flashcards
What does a positive cash flow permit a company to do?
Take advantage of market opportunities
Pay dividends to owners
Expand its operations
Replace worn assets
What does the statement of cash flows show?
Changes in cash and cash equivalents during a period
Cash comprises cash on hand and on demand deposits
What are cash equivalents?
Short term
Highly liquid investments
Readily convertible to known amounts of cash
Which are subject to insignificant risk of change in value
What are the three sections of cash flow statement?
CF from operating activities
CF from investing activities
CF from financing activities
What does operating cash flow show?
Operating activities include cash received and paid related to selling goods and rendering services
and are directly related to the company’s primary day-to-day business activities.
What are some examples of positives and negatives on operating cash flows?
+ : Sale of goods, Rendering of services, Royalties, Fees, Commission
- : Payment to suppliers, Other expenses, Employees’ wage
What does a healthy operating cash flow show and allow?
- A financially healthy company generates sustained cash inflows
from selling goods and providing services. - The amount of cash flow from operations indicates the extent to
which operating activities generate more cash than they use. - A firm can use cash flow from operations to acquire buildings
and equipment, pay dividends, retire long-term debt, and pay
for other investing and financing activities.
What does investing cash flows show?
- The acquisition of noncurrent assets, particularly property, plant,
and equipment, usually represents a major ongoing use of
cash. - Firms not experiencing rapid growth can often finance the
acquisition of noncurrent assets with cash flow from operations. - Rapidly growing firms must often borrow funds or issue
common shares to finance these acquisitions.
What are examples of investing cash flows?
+ : Sale of PPE, Sale of shares of other companies, Collection of loans made to other entities
- : Cash payments to acquire PPE, Buying shares of other companies, Lending money
What does a financing cash flow show?
A firm obtains cash from borrowing and from issuing shares.
It uses cash to pay shareholders dividends, repay borrowing, and acquire own shares.
These amounts appear as cash flow from financing activities in the statement of cash flows.
What are examples of financing cash flows?
+ : Issuing shares, Issuing notes and bonds, Obtaining bank loans
- : Cash payments to acquire own shares, Principal repayments on loans, Payment of dividends
What are the 4 phases of the corporate life cycle?
Introductory, Growth, Maturity, Decline
Draw the typical corporate life cycle of a cash flow (labelled)?
Finance originally high and declines
Operating stats negative and increases before decline phase when it decreases
Investing begins negative and slower than operating it becomes positive until decline phase when it decreases
What are the two methods of preparing the statement of cash flows?
Direct method:
-Examine all cash transactions that occur during the period
-Group them accordingly to the type of activity
Indirect method
-Start with net income, adjust for non cash transactions and working capital changes
In which order is the statement of cash flow structure?
Operating
Investing
Financing
Using the indirect method how would you calculate net cash flows from operating activities?
Profit before tax + (+Depreciation/Amortization expense
+Loss/-Profit on disposal of non-current assets
+/– provision increases /decreases) + (Interest expense) + (+decrease/−increase in inventories) + (+decrease/−increase in receivables/prepayments) + (+increase/−decrease in payables) - (Interest paid) - (Taxation paid) - (Dividend paid) = Net cash flows from operating activities
Why is the indirect method preffered?
Easier and less expensive
Companies that use the direct method are required to present a supplemental disclosure showing the reconciliation of net income to cash from operations.
Why do we add back depreciation to the profit before taxation?
Depreciation is a non cash expense that reduces the profit but not the actual cash flow.
When creating the operating cash flow what do you do with (Depreciation/amortization/impairment losses/ provision for doubtful
debt increases) from the income statement? Why do you do what you do?
They are added back.
* these expenses eg, depreciation, were deducted in calculating
net profit
* they have no effect on cash flows
* So they are added back
When creating the operating cash flow what do you do with (gain on disposal of non-current assets) from the income statement? Why do you do what you do?
They are subtracted
* gain was added in calculating net profit
* this is an investing (not operating) cash flow
* we subtract the gain, calculate cash received from disposal and
include this figure in investing cash flows (note that gain/loss on
disposal does not equal cash received from selling non-current
assets)
When creating the operating cash flow what do you do with (loss on disposal of NCA) from the income statement? Why do you do what you do?
They are added back
* loss was deducted in calculating net profit
* we add back the loss, calculate cash received from disposal and
include this figure in investing cash flows
When creating the operating cash flow what do you do with (Interest income) from the income statement? Why do you do what you do?
It is subtracted
* interest income was added in calculating net profit
* we subtract the interest income (IS figure)
* we calculate cash received and include this figure in investing or
operating cash flows
When creating the operating cash flow what do you do with (interest expense) from the income statement? Why do you do what you do?
It is added back
* interest expense was deducted in calculating net profit
* we add back the interest expense (IS figure)
* we calculate interest paid and include this figure in financing or
operating cash flows
How is Interest paid (cash outflow) calculated? Where is this figure included?
Opening interest liability (interest payable, SOFP)
+ Income Statement charge (i.e. interest expense)
- Closing interest liability (interest payable, SOFP)
Interest and dividends paid may be classified as operating or financing cash flows (under IFRS).
