Chapter 3: Statement of Cash Flows exam questions with 100% correct answers

IAS: 7 demonstrates the cash needs of the entity and its ability to generate C&CE SCF provides historical information about movements in C&CE in a period, classifying cash flows between operating, investing and financing activities Cash Flows Inflows and outflows of C&CE All entities are required by the standard to produce a SCF The need for cash is universal to all entities, whatever their nature. SCF is therefore an integral part of the FS Benefits of cash flow information When used in conjunction with the other statements, users gain further appreciation of - the change in net assets - entity's financial position (liquidity and solvency) - entity's ability to adapt to changing circumstances and opportunities by affecting the amount and timing of cash flows Statements of cash flows enhance comparability because they are not affected by the use of different a/c policies for the same types of transactions and events The relationship between profit and cash flows and the need for cash can be analysed over time Cash flow information is an indicator of the amount, timing and certainty of future cash flows Cash: Cash on hand and demand deposits Cash Equivalents: Short-term highly-liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. They are not held for investment or other long term purposes but to meet short term cash commitments. Maturity dates should be within 3 months of the acquisition date Equity investments are not C&CE unless prefs very close to maturity Points to note re SCF Loans and borrowings from banks are classed as Financing Activities. However, an overdrawn bank account balance is included in C&CE as a negative (overdrafts are repayable on demand) Movements between different types of C&CE are not included in SCF. These are just part of cash management. Presentation of SCF Statement of Cash Flows for the y/e 31 December 2011 Cash Flows from Operating Activities Cash generated from operations Interest paid Income taxes paid Net Cash From Operating Activities Cash Flows from Investing Activities Purchase of PPE Proceeds from sale of PPE Interest received Dividends received Net Cash Used In Investing Activities Cash Flows from Financing Activities Proceeds from issue of share capital Proceeds from issue of long-term borrowings Dividends paid Net Cash Used In Financing Activities Net Increase in C&CE C&CE at beginning of the period C&CE at end of the period Information required for SCF SFP at the beginning of the year SFP at the end of the year IS for the c/y The IS for the p/y is not necessary and should be ignored if given in the Q Operating Activities Cash from operating activities is key as businesses must ultimately use this to finance their other activities Most items in here will be those that determine the net profit for the period: -cash from sales of goods and services, royalties and commissions and other revenue -cash payments to suppliers for goods and services -cash payment to employees -cash flows from interest paid and taxes are also dealt with here Cash generated from Operations: 2 Methods Direct Method (preferred by IAS 7 - longer) Indirect Method Indirect method (used in exam) Reconcile Profit Before Tax per IS with Cash generated from Operations (first line on SCF): Profit/Loss Before Tax + Finance cost - Investment Income + Depreciation + Amortisation - Profit on disposal of NCA + Decrease in Inventories + Decrease in Receiveables + Decrease in Prepayments + Increase in Trade Payable + Increase in Accruals + Increase in Provisions = Cash Generated from Operations Reconciliation Note from PBT to Cash Flows from Operations - should be shown as a Note to the SCF Direct Method: Gross Operating Cash Flows: Cash receipts from customers - Cash payments to suppliers and employees = Cash Generated from Operations Payments of Interest and Tax (Income tax only, not tax paid re employees or VAT) In a T account for Interest and Tax, the cash flow is