Deck 7: The Cash Flow Statement Statement of Cash Flows

Question 1

The following is a list of amounts taken from the records of Lilly Lavender's,a flower sales and arranging service,for the year to 31/12/20X1.
a Prepare a fully classified Cash Flow Statement for the year ending 31 December 20X1.(Note: some items listed are not cash flow items. )
b Comment on Lilly's cash flows,in regard to operating,investing and financing activities,the ending cash bank balance,and any items you consider are relevant.
c Assume Lilly's net profit on her Income Statement is $240,000.Compare this with the final net operating cash flow for the business,and suggest reasons for the difference.
d Make 3 recommendations to Lilly in regard to her cash flows and cash position.

Answer 1

a
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b Lilly has very good cash flow from operations,with a net cash inflow of $207,000.This is easily sufficient to cover her drawings of $90,000.
However,she has purchased new buildings which has meant a net cash outflow from investing activities.Repayment of a large mortgage has also resulted in a net cash outflow from financial activities.
The overall net cash outflows from investing and financing has resulted in an overall net cash outflow of $47,000,which has increased her bank overdraft for the year.
Interest paid at $35,000 is quite high,and part of this may be due to the high ending bank overdraft.
c The net profit is quite a bit higher than the net cash flow from operations.This suggests that Lilly is not collecting her sales amounts from customers in total,and perhaps some of her sales are 'paper sales',i.e.sales to customers who have struck financial difficulties and will not be able to pay.
d Reduce drawings if possible to free up more cash for use in the business,especially to repay the bank overdraft and avoid high interest costs.
If possible,borrow short- or medium-term funds to pay off the overdraft,and avoid high overdraft interest charges.
Consider taking out a larger long-term mortgage (at more favourable rates than the bank overdraft)to replace some or all of the interest facility.

Question 2

Which net cash flow must be positive if the firm is to continue operating in the long term?
A Operating activities
B Financing activities
C Investing activities
D Final net cash flow,plus starting and ending cash balance
E None of the above

Answer 2

A

Question 3

Complete the following matrix relating to the Cash Flow Statement and the Income Statement (Statement of Financial Performance),in the following areas:

Answer 3

Question 4

What are main components of the Cash Flow Statement?
A Operating,investing and financing activities
B Net cash flows for the year
C Cash balance at the start of the year
D Cash balance at the end of the year
E All of the above

Question 5

Which section of the Cash Flow Statement reconciles to an item in the Current assets section of the Balance Sheet?
A Operating activities
B Financing activities
C Investing activities
D Final net cash flow,plus starting and ending cash balance
E None of the above

Question 6

NZ IAS 7 requires cash flow information to be classified by 3 major sources and dispositions.State and briefly describe each one of the three,with examples.

Question 7

Which section of the Cash Flow Statement is reconciled to net profit in the Income Statement?
A Operating activities
B Financing activities
C Investing activities
D Final net cash flow,plus starting and ending cash balance
E None of the above

Question 8

Which section of the Cash Flow Statement shows cash flows from purchasing and selling income-generating assets,such as property,plant and equipment,shares in other companies and term deposits?
A Operating activities
B Financing activities
C Investing activities
D Final net cash flow,plus starting and ending cash balance
E None of the above

Question 9

Which of the following items are required by NZ IAS 7 to be shown separately on the Cash Flow Statement?
A Interest
B Dividends
C Income tax
D All of the above

Question 10

Which section of the Cash Flow Statement includes the normal income-generating operations of the business?
A Operating activities
B Financing activities
C Investing activities
D Final net cash flow,plus starting and ending cash balance
E None of the above

Question 11

The following is a list of amounts taken from the records of Don's Dents,a second-hand car sales yard operating in Taranaki,for the year to 31/12/20X1.
a Prepare a fully classified Cash Flow Statement for the year ending 31 December 20X1.(Note: some items listed are not cash flow items. )
b Comment on Don's cash flows,in regard to operating,investing and financing activities,the ending cash bank balance,and any items you consider are relevant.
c Assume Don's net profit on his Income Statement is $210,000.Compare this with the final net operating cash flow for the business,and suggest reasons for the difference.
d Make 3 recommendations to Don in regard to his cash flows and cash position.

Question 12

Outline 3 reasons why net profit may differ from operating net cash flows.

Question 13

What are some of the key areas Cash Flow Statements help readers to assess in regard to a business?

Question 14

Which section of the Cash Flow Statement shows cash flows from obtaining funds to set up,operate and expand the business's operations,and also to repay borrowed funds?
A Operating activities
B Financing activities
C Investing activities
D Final net cash flow,plus starting and ending cash balance
E None of the above