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Questions and Answers
What is the effect of profits on cash flow?
What is the effect of profits on cash flow?
What happens to cash flow when fixed assets are sold?
What happens to cash flow when fixed assets are sold?
How does a decrease in stock impact cash flow?
How does a decrease in stock impact cash flow?
Which statement correctly describes the relationship between debtors and cash inflow?
Which statement correctly describes the relationship between debtors and cash inflow?
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What is the main purpose of the statement of comprehensive income?
What is the main purpose of the statement of comprehensive income?
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What effect does a decrease in creditors have on cash?
What effect does a decrease in creditors have on cash?
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Which of the following leads to an increase in cash entering the business?
Which of the following leads to an increase in cash entering the business?
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How does cash flow at the end of the current period relate to previous cash flows?
How does cash flow at the end of the current period relate to previous cash flows?
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Study Notes
Cash Flow Statements
- A cash flow statement tracks where cash comes from and where it goes.
- Exhibit 39.1 details cash flow.
Cash Comes From
- Profits: Increased cash.
- Sales of Fixed Assets: Sale of assets.
- Decrease in Stock: Reduced inventory.
- Decrease in Debtors: Payments received.
- Capital Introduced: Investments.
- Loans Received: Loans.
- Increase in Creditors: Increased debts.
Cash Goes To
- Losses: Reduced cash.
- Purchase of Fixed Assets: Buying assets.
- Increase in Stock: More inventory.
- Increase in Debtors: Credit given to customers.
- Drawings/Dividends: Payments to owners.
- Loans Repaid: Loans repaid.
- Decrease in Creditors: Reduced debts.
Explanation of Cash Flow
- Profits: Generate increased cash, losses reduce it.
- Sales of Fixed Assets: Selling fixed assets brings cash in.
- Decrease/Increase in Stock: Lower inventory means cash inflow. Higher means cash outflow.
- Decrease/Increase in Debtors: Lower debtors means more money, higher means less.
- Capital Introduced/Drawings: Investments or withdrawals of owner's capital.
- Loans Received/Repaid: Increases or decreases cash (from loans).
- Increase/Decrease in Creditors: More credit leads to more cash available, lower credit leads to less.
Calculating Cash Flow at the End of Period
- Start with beginning cash balance.
- Add all cash inflows during the period.
- Subtract all cash outflows during the period.
- The result is the ending cash balance.
Relationship Between Statements
- Statement of Comprehensive Income: Tracks changes in the business's net assets over a period.
- Statement of Financial Position: Snapshot of assets, liabilities and equity at a point in time.
Advantages of Cash Flow Statements
- Predicting future cash flow: Better judge potential future cash.
- Evaluating financial viability: Better understanding of firm's liquidity position.
- Avoid manipulation: Not susceptible to accounting choices.
- Compare value over time: Compare different periods to look for any trends.
- Link profitability to cash generation: Better understanding of profitability and cash generation.
Disadvantages of Cash Flow Statements
- Short-term focus: Prioritizes short-term operations over long-term investment needs.
- Past data limitations: Based on past data and not fully predictive of future flow.
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Description
This quiz provides an in-depth understanding of cash flow statements, focusing on the sources and uses of cash within a business. Explore the various components such as profits, asset sales, and how losses affect overall cash flow. Ideal for students looking to grasp the basics of financial tracking.
