Week 8

Question 1

What is the main purpose of the Statement of Cash Flows (SOCF)?

Answer 1

To show how a company’s cash and cash equivalents have changed during the period by reporting cash inflows and outflows from operating, investing, and financing activities.

Question 2

What are the three sections of the SOCF?

Answer 2

• CFO – Cash flows from operating activities
• CFI – Cash flows from investing activities
• CFF – Cash flows from financing activities

Question 3

What is the difference between the direct and indirect method of calculating CFO?

Answer 3

• Direct: Lists actual cash inflows and outflows (e.g., receipts from customers, payments to suppliers)
• Indirect: Starts with net profit and adjusts for non-cash items and working capital changes

Question 4

Why do most companies use the indirect method?

Answer 4

It’s more practical — the required info is already available from the SOPL and SOFP.

Question 5

Which method does IAS 7 prefer and why?

Answer 5

The direct method – because it provides better insight into future cash flow forecasting.

Question 6

What items are typically adjusted in the indirect method?

Answer 6

• Add non-cash expenses (e.g., depreciation, amortisation)
• Adjust for working capital changes (inventory, receivables, payables)
• Remove non-operating gains/losses (e.g., profit on asset disposal)

Question 7

Give two examples of cash flows that belong in CFI.

Answer 7

• Purchase of PPE
• Proceeds from sale of PPE or intangible assets

Question 8

Give two examples of cash flows that belong in CFF.

Answer 8

• Proceeds from issuing shares or borrowings
• Dividends paid or loan repayments

Question 9

Define cash equivalents.

Answer 9

Short-term, highly liquid investments that are readily convertible to known amounts of cash and have a maturity of 3 months or less.

Question 10

Why might SOCF be considered more reliable than the SOPL for assessing short-term financial health?

Answer 10

Because it focuses on actual cash movement, not just accounting profits, and is harder to manipulate.

Question 11

What effect does an increase in inventory have on CFO (indirect method)?

Answer 11

It reduces CFO – cash is used to buy more stock.

Question 12

What effect does an increase in trade payables have on CFO?

Answer 12

It increases CFO – the company delays paying suppliers, retaining cash.