Podcast
Questions and Answers
Why is depreciation added back to profit before tax in the operating activities section of the cash flow statement?
Why is depreciation added back to profit before tax in the operating activities section of the cash flow statement?
- To eliminate the non-cash effect of this expense and accurately reflect cash flow. (correct)
- To comply with taxation regulations.
- To increase the reported profit for the period.
- To reflect the cash outflow associated with the depreciation expense.
How does an increase in accounts receivable typically impact the cash flow from operating activities?
How does an increase in accounts receivable typically impact the cash flow from operating activities?
- It decreases cash flow because sales have been recorded, but cash hasn't been received yet. (correct)
- It has no impact on cash flow.
- It depends on whether the company uses direct or indirect method.
- It increases cash flow, as more customers are paying their bills.
Which of the following adjustments is necessary when calculating cash flow from operating activities using the indirect method?
Which of the following adjustments is necessary when calculating cash flow from operating activities using the indirect method?
- Adding back proceeds from issuing bonds.
- Adding back cash dividends paid.
- Deducting depreciation expense.
- Deducting gains from the sale of equipment. (correct)
Why are losses on the disposal of assets added back when calculating cash flow from operating activities?
Why are losses on the disposal of assets added back when calculating cash flow from operating activities?
How does an increase in inventory typically affect the cash flow from operating activities?
How does an increase in inventory typically affect the cash flow from operating activities?
How is the cash flow related to interest expense treated under the operating activities section?
How is the cash flow related to interest expense treated under the operating activities section?
Where would the proceeds from issuing new shares be reported on the statement of cash flows?
Where would the proceeds from issuing new shares be reported on the statement of cash flows?
How are dividends paid to shareholders classified on the statement of cash flows?
How are dividends paid to shareholders classified on the statement of cash flows?
How are proceeds from the sale of equipment classified on the statement of cash flows?
How are proceeds from the sale of equipment classified on the statement of cash flows?
Free cash flow is calculated as _______ less cash used for investing activities.
Free cash flow is calculated as _______ less cash used for investing activities.
When calculating the cash flow from investing activities, which of the following items is considered a cash outflow?
When calculating the cash flow from investing activities, which of the following items is considered a cash outflow?
Why is it important to analyze the statement of cash flows?
Why is it important to analyze the statement of cash flows?
How would proceeds from a loan be classified on the statement of cash flows?
How would proceeds from a loan be classified on the statement of cash flows?
In the context of the statement of cash flows, what does 'Net Cash Inflow/(outflow) for the year' represent?
In the context of the statement of cash flows, what does 'Net Cash Inflow/(outflow) for the year' represent?
Which section of the cash flow statement would include the purchase of a new building to be used as the company’s headquarters?
Which section of the cash flow statement would include the purchase of a new building to be used as the company’s headquarters?
How does an increase in accounts payable typically impact the cash flow from operating activities, when using the indirect method?
How does an increase in accounts payable typically impact the cash flow from operating activities, when using the indirect method?
Which of the following best describes the treatment of bad debt expense in the operating activities section of the cash flow statement?
Which of the following best describes the treatment of bad debt expense in the operating activities section of the cash flow statement?
Which of the following impacts the statement of cash flows?
Which of the following impacts the statement of cash flows?
Why is opening cash and cash equivalents added to Net Cash Inflow/(Outflow) for the year when preparing a statement of cash flows?
Why is opening cash and cash equivalents added to Net Cash Inflow/(Outflow) for the year when preparing a statement of cash flows?
What is the result of deducting additions against ‘payable’ or ‘share issue’ from Property, plant, and equipment?
What is the result of deducting additions against ‘payable’ or ‘share issue’ from Property, plant, and equipment?
Flashcards
Depreciation (Cash Flow Statement)
Depreciation (Cash Flow Statement)
Non-cash expense that reduces profit but doesn't affect cash flow.
Impairment (Cash Flow)
Impairment (Cash Flow)
Non-cash expense; reduces profit but does not affect cash flow.
Bad Debt Expense (Cash Flow)
Bad Debt Expense (Cash Flow)
Non-cash expense that reduces profit but does not impact cash.
Gain on Disposal (Cash Flow)
Gain on Disposal (Cash Flow)
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Loss on Disposal (Cash Flow)
Loss on Disposal (Cash Flow)
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Interest Expense (Cash Flow)
Interest Expense (Cash Flow)
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Dividend/other income (Cash Flow)
Dividend/other income (Cash Flow)
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Increase in Trade Receivable (Cash flow)
Increase in Trade Receivable (Cash flow)
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Increase in Inventory (Cash Flow)
Increase in Inventory (Cash Flow)
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Interest paid (Cash Flow)
Interest paid (Cash Flow)
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Tax Paid (Cash Flow)
Tax Paid (Cash Flow)
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Depreciation (Property, plant and equipment)
Depreciation (Property, plant and equipment)
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Impairment (Property, plant and equipment)
Impairment (Property, plant and equipment)
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Adjustments (Property, plant and equipment)
Adjustments (Property, plant and equipment)
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Cash Dividend
Cash Dividend
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Share capital (Finance)
Share capital (Finance)
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Study Notes
- Cash flow summary outlines the cash inflows and outflows of a company
Operating Activities
- Profit before tax is adjusted to arrive at cash generated from operations.
- Adjustments are made from the Profit and Loss (P&L) or Retained Earnings if not given.
Adjustments to Profit Before Tax
- Depreciation, impairment, and bad debt expense are added, as they are non-cash expenses that reduce profit but don't impact cash.
- Gains on disposal are subtracted to remove the impact of gains in P&L and show gross receipts in investing activities
- Losses on disposal are added to remove the impact of losses in P&L and show gross receipts in investing activities
- Interest expense is added to cancel out the expense in P&L and show the actual cash payment from operations
- Dividend or other income is deducted to remove the impact of income appearing in P&L and show gross receipts in investing activities.
Working Capital Changes
- Increase in gross trade receivable is subtracted and decrease is added because an increase means sales were made and cash not yet received
- Increase in inventory is subtracted and decrease is added because an increase means more was purchased and less used
- Increase in payable or accrual is added and decrease it subtracted because this corresponds to when an expense is incurred but not paid
- Interest paid and tax paid are subtracted from cash generated from operations.
- Subtracting from Opening or Closing any other receivable like disposal of PPE receivable before incorporating working capital
- Subtracting from Opening or Closing any other payable like interest payable before incorporating working capital
- Net cash generated from operations is represented by 'A'.
Investing Activities
- Cash paid to acquire property, plant, and equipment (PPE) is subtracted
- Proceeds from the disposal of PPE, dividends, & interest received are added.
- Deduct addition against "payable" or "share issue"
- "Less any amount receivable against sales"
- Cash generated from investing activities is 'B'.
- Opening balance, depreciation, disposal, and impairment impact the carrying amount.
Financing Activities
- Proceeds from the issuance of shares and loan repayment are added
- Cash dividend paid is subtracted.
- Profit/loss is the selling price less the carrying amount
- Cash generated from financing activities = 'C'.
- Share capital and premium increase from bonus RE, PPE (if any), and cash issues.
Final Calculations
- Net cash inflow/ (outflow) for the year is A+B+C.
- Closing cash and cash equivalent is calculated by adding opening cash and cash equivalent to the net cash flow.
- Retained earnings account is impacted by bonus shares, cash dividend, and profit after tax (PAT).
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