1. What is the purpose of a cash flow statement?

The purpose of a cash flow statement is to provide a detailed picture of what happened to
a business's cash during a specified period, known as the accounting period. It
demonstrates an organization's ability to operate in the short and long term, based on how
much cash is flowing into and out of the business.

2. Identify the benefits of cash flow statements

(1) Cash Flow Statement helps the management to ascertain the liquidity and
profitability position of businesses. Liquidity refers to one's ability to pay the obligation as
soon as it becomes due.

(2) Cash Flow Statement helps in knowing the exact figure of cash inflows and outflows
from various operations of the business. It helps in comparing the cash budgets of past
assessments with the present to assess the future requirements of the cash. It gives the
accurate information about the cash-based transactions in the business.

(3) Cash flow statement majorly used in preparing the cash budget for future needs and
helps in knowing the periodical requirement of cash in the business

(4) It reveals the key changes required for the financial positioning of the business and
prioritizes important activities to the management.

(5) It provides the information about various investing and financing cash transactions takes
place during the year and helps in evaluating the financial structure of the business.

(6) Cash Flow statement helps in identifying the profitability of the business when it
compared with the ratio analysis.
 3. Define the following key terms: (i) cash; (ii) cash equivalents; (iii) operating
activities; (iv) investing activities; and (v) financing activities and give examples of
each.

Cash —> can be cash on hand or cash in bank

Definition:
refers to money (currency) that is readily available for use. It may be kept in physical form,
digital form, or invested in a short-term money market product. In economics, cash refers
only to money that is in the physical form

Cash is classified as a current asset on the balance sheet and is therefore increased on the
debit side and decreased on the credit side. Cash will usually appear at the top of the current
asset section of the balance sheet because these items are listed in order of liquidity.

Example:

Cash equivalents

Definition:
Short term back requisites that are highly liquid, able to change easily to cash
Cash equivalents are the total value of cash on hand that includes items that are similar to
cash; cash and cash equivalents must be current assets. A company's combined cash or cash
equivalents is always shown on the top line of the balance sheet since these assets are the
most liquid assets.

Example:
include, but are not limited to: Treasury bills. Treasury notes. Commercial paper.
Operating activities

Definition:
Operating activities are all the things a company does to bring its products and services to
market on an ongoing basis. Non-operating activities are one-time events that may affect
revenues, expenses or cash flow but fall outside of the company's routine, core business.

Example:
Some common operating activities include cash receipts from goods sold, payments to
employees, taxes, and payments to suppliers. These activities can be found on a company's
financial statements and in particular the income statement and cash flow statement.

Investing activities

Definition:
Investing activities in accounting refers to the purchase and sale of long-term assets and other
business investments, within a specific reporting period. A business's reported investing
activities give insights into the total investment gains and losses it experienced during a
defined period.

Example:
● Purchase of property plant, and equipment (PP&E), also known as capital
expenditures.
● Proceeds from the sale of PP&E.
● Acquisitions of other businesses or companies.
● Proceeds from the sale of other businesses (divestitures)

Financing activities

Definition:
Financing activities are transactions between a business and its lenders and owners to acquire
or return resources. In other words, financing activities fund the company, repay lenders, and
provide owners with a return on investment. Financing activities include: Issuing and
repurchasing equity.

Example:
The activities include issuing and selling stock, paying cash dividends and adding loans.
A positive number on the cash flow statement indicates that the business has received cash.
This boosts its asset levels.

4. How are interest and dividends paid and interest and dividends received classified in
the cash flow statements?

Interest and dividends received or paid are classified in a consistent manner as either
operating, investing or financing cash activities. Interest paid and interest and dividends
received are usually classified in operating cash flows by a financial institution. taxes are
generally classified as operating activities.

5. Distinguish among operating, investing and financing cash flows

 6. Prepare the cash flows from operating activities using the indirect method

https://www.indeed.com/career-advice/career-development/indirect-method-for-cash-flow-sta
tement

1. Gather the necessary documents

Find the information you need to prepare a cash flow statement on the company's balance
sheet and income statement. The balance sheet shows the company's assets and liabilities,
while the income statement shows expenses and revenue.

2. Start with net income

Place the net income for the current financial period on the first line of the cash flow
statement. You can list gains or losses on each line below this figure, adding or subtracting
their totals from the net income as you go. Show deductions by placing them in parentheses.

3. List non-cash operating activities

Add or subtract from the net income non-cash gains, losses or expenses, including
depreciation, amortization, depletion, gains or losses from asset sales and losses from
accounts receivable. Group all depreciation expenses (assets' reduced value over time) and
use that total as your depreciation figure.

4. List cash operating activities

Then, list on each subsequent line all cash gains or losses, including expenses, inventory and
accounts receivable. When adjusting the net income for cash gains and losses, subtract asset
increases from the income and add asset decreases to the income.

5. List liabilities
For the last part of the operating activities section of the cash flow statement, you must adjust
net income for cash changes to liability accounts such as accounts payable and accrued
expenses. Liability adjustments are the opposite of asset adjustments. You add liability
increases to the net income and subtract liability decreases from the income.

6. Calculate operating adjustments

Place the total of all the adjustments in this section on a line labeled "Net cash from operating
activities."

7. Add investing activities

In the second section of the cash flow statement, simply add or subtract all investing
activities, such as buying or selling stock or assets, for the period to calculate net cash from
investing activities.

8. Add financing activities

In this section, add or subtract all actions the company has made to finance its operations for
the period to calculate net cash from financing activities.

9. Calculate net increase or decrease

Add the totals from the operating, investing and financing sections together to get the
company's net increase or decrease in cash.

10. Determine the cash balance

On the last lines of the statement, list the beginning (opening) cash balance, adjust it for the
net increase or decrease amount and list that adjusted figure as the ending (closing) cash
balance on the next line. The beginning and ending balance amounts are useful for assessing
financial performance over time.

Indirect accounting method template

Input your company's information into this template to calculate cash flow through the
indirect method:
[Company name]
Statement of Cash Flows
For the [time period] ended [date]

Cash flows from operating activities

Net income: [Amount]
Adjustments for:
[Noncash activity]: [Amount]
[Asset]: [Amount]
[Asset]: [Amount]
[Asset]: [Amount]
[Liability]: [Amount]
[Liability]: [Amount]
Net cash from operating activities: [Amount]

Cash flows from investing activities

[Activity]: [Amount]
Net cash from investing activities: [Amount]

Cash flows from financial activities

[Activity]: [Amount]
Net cash from financial activities: [Amount]

Net cash increase/decrease: [Amount]

Beginning cash amount: [Amount]
Ending cash amount: [Amount]
 7. Prepare cash flows from investing activities

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ng-activities/

Cash Flow from Investing Activities is the section of a company’s cash flow statement that
displays how much money has been used in (or generated from) making investments during a
specific time period.

Investing activities include purchases of long-term assets (such as property, plant, and
equipment), acquisitions of other businesses, and investments in marketable securities (stocks
and bonds).
 8. Prepare cash flows from financing activities

https://www.investopedia.com/terms/c/cashflowfromfinancing.asp#:~:text=Add%20cash%20
inflows%20from%20the,financing%20activities%20for%20the%20period.

Cash flow from financing activities (CFF) is a section of a company’s cash flow statement,
which shows the net flows of cash that are used to fund the company. Financing activities
include transactions involving debt, equity, and dividends.

Cash flow from financing activities provides investors with insight into a company’s financial
strength and how well a company's capital structure is managed

Formula:

CFF = CED − (CD + RP)

Where:
CED = Cash in flows from issuing equity or debt
CD = Cash paid as dividends
RP = Repurchase of debt and equity

(1) Add cash inflows from the issuing of debt or equity.

(2) Add all cash outflows from stock repurchases, dividend payments, and repayment of debt.
(3) Subtract the cash outflows from the inflows to arrive at the cash flow from financing
activities for the period.
 9. Prepare the cash flows from operating activities using the direct method

https://www.thebalancemoney.com/prepare-a-statement-of-cash-flows-using-the-direct-metho
d-393238

The direct method of developing the cash flow statement lists operating cash receipts (e.g.,
receipt from customers) and cash payments (e.g., payments to employees, suppliers,
operations, etc.) in the operating activities section. In this section, any interest paid on
outstanding debt is also reported along with all income taxes paid. Using the direct method,
the result is cash receipts minus cash disbursements, and the final figure is net cash flows
from operations.

Issues With the Direct Method

One of the problems with the direct method is the level of complexity involved in preparing
the cash flows statement. If your business is small, then listing your cash receipts and cash
payments is simple. As a business grows, imagine all of the cash receipts and cash payments
from different sources that would have to be listed. The direct method becomes very
complex, which is why the majority of companies use the indirect method of developing a
cash flow statement.

Another problem with the complexity of the direct method is that all accounting transactions
affect two accounts. In addition to all the cash transactions to contend with, each cash
transaction affects another account, such as inventory or accounts receivable, and you have to
consider those accounts when developing the statement of cash flows.

Operating Section Format

The direct method is also called the income statement method. The simplest format of the
direct method looks something like this:

Cash Flow from Revenue

- Cash Payments for Expenses

= Income Before Income Taxes

- Cash Payment for Income Taxes

= Net Cash Flow From Operating Activities

 10. Explain the disclosure requirements for cash flows

Cash flow disclosures should supplement the information on liquidity given in the
statement of financial position.

IAS 7 requires an entity to disclose the components of cash and cash equivalents and to
present a reconciliation of the amounts in its statement of cash flows with the equivalent
items reported in the statement of financial position.

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11. Compute cash flow related ratios

A cash flow ratio is a measure of the number of times a company can pay off current
debts with cash generated within the same period. A high number, greater than one,
indicates that a company has generated more cash in a period than what is needed to pay off
its current liabilities.

6 types of cash flow ratios:

1. Current liability coverage ratio.

Definition:
measures a company's ability to pay current, or short-term, liabilities (debts and
payables) with its current, or short-term, assets, such as cash, inventory, and
receivables.

Formula:
cash flows from operations divided by current liabilities.

A good value :
between 1.2 to 2
If this ratio is less than 1:1, a business is not generating enough cash to pay for its immediate
obligations, and so may be at significant risk of bankruptcy.
 2. Cash flow coverage ratio.

Definition:
a liquidity ratio that measures a company's ability to pay off its obligations with its
operating cash flows.
shows how easily a firm's cash flow from operations can pay off its debt or current expenses.

Formula:
Calculated as operating cash flows divided by total debt.

A good value :
This ratio should be as high as possible, which indicates that an organization has sufficient
cash flow to pay for scheduled principal and interest payments on its debt.

A ratio less than 1 indicates short-term cash flow problems; a ratio greater than 1 indicates
good financial health, as it indicates cash flow more than sufficient to meet short-term
financial obligations.

3. Price-to-cash-flow ratio.

Definition:
a ratio used to compare a company's market value to its cash flow. It is calculated by
dividing the company's market cap by the company's operating cash flow in the most recent
fiscal year; or, equivalently, divide the per-share stock price by the per-share operating cash
flow.

Formula:
divide the share price by the operating cash flow per share.

A good value : a value of less than 15 to 20 is generally considered good

 4. Cash interest coverage ratio.

Definition:
The interest coverage ratio is a debt and profitability ratio used to determine how easily a
company can pay interest on its outstanding debt.
The interest coverage ratio is sometimes called the times interest earned (TIE) ratio.

Formula: dividing a company's earnings before interest and taxes (EBIT) by its interest
expense during a given period.

A good value :
While an interest coverage ratio of 1.5 may be the minimum acceptable level, two or better
is preferred for analysts and investors. For companies with historically more volatile
revenues, the interest coverage ratio may not be considered good unless it is well above three.

5. Operating cash flow ratio.

Definition:
The operating cash flow ratio is a measure of the number of times a company can pay off
current debts with cash generated within the same period.

Formula:
dividing operating cash flow by current liabilities.
Operating cash flow is the cash generated by a company's normal business operations.

A good value :
A ratio less than 1 indicates short-term cash flow problems; a ratio greater than 1 indicates
good financial health, as it indicates cash flow more than sufficient to meet short-term
financial obligations.

A high number, greater than one, indicates that a company has generated more cash in a
period than what is needed to pay off its current liabilities.
 6. Cash flow to net income ratio

Definition:
The Cash to Income Ratio is a liquidity ratio. This shows the relationship between the cash
flow and a firm's operating income. In other words, it indicates how much dollars of cash
actually flows per dollar of operating income of the company from its operating
activities.

Formula:
Cash flow from operations (CFO)/Operating income.

A good value :
A higher ratio – greater than 1.0 – is preferred by investors, creditors, and analysts, as it
means a company can cover its current short-term liabilities and still have earnings left over.
Companies with a high or uptrending operating cash flow are generally considered to be in
good financial health.

12. Does an increase in current assets,other than cash,indicate an increase in cash or a

decrease in cash?

If a current asset's balance (other than cash) had increased, the amount of the increase is
subtracted from the amount of net income. The increase in a current asset (other than
cash) had a negative/unfavorable effect on the company's cash balance.

13. Does an increase in current liabilities, other than cash, indicate an increase in cash or
a decrease in cash?

Any increase in liabilities is a source of funding and so represents a cash inflow:

Increases in accounts payable means a company purchased goods on credit, conserving its
cash.
 14. What does FRS 7 require of investing and financing transactions that do not require
the use of cash or cash equivalents?

43 Investing and financing transactions that do not require the use of cash or cash equivalents
shall be excluded from a statement of cash flows. Such transactions shall be disclosed
elsewhere in the financial statements in a way that provides all the relevant information about
these investing and financing activities.

15. How do you compute the free cash flow for a company?

(1) Free cash flow = sales revenue - (operating costs + taxes) - required investments in
operating capital.

(2) Free cash flow = net operating profit after taxes - net investment in operating capital.

16. How do you compute the cash realisation ratio for a company?

The cash ratio is derived by adding a company's total reserves of cash and near-cash
securities and dividing that sum by its total current liabilities. The cash ratio is more
conservative than other liquidity ratios because it only considers a company's most liquid
resources.