Quiz-3 Illustrative Financial Statement (Cash Flow, Indirect Method)

Course Content:

The Cash Flow Statement explains how cash moves in and out of a company. Unlike the P&L (which includes non-cash items), the Cash Flow Statement shows actual liquidity – essential for assessing solvency.

IAS 7 requires three sections:

1.      Operating Activities – day-to-day cash generation (receipts from customers, payments to suppliers/employees).

o    Indirect Method: Start with Net Profit → adjust for non-cash items (depreciation, provisions) → adjust for changes in working capital (inventory, receivables, payables).

2.      Investing Activities – purchase/sale of PPE, investments, intangibles.

3.      Financing Activities – cash from issuing shares, borrowings, repayments, dividends paid.

Key IFRS points:

·         Non-cash transactions (e.g., acquiring machinery with a loan) are excluded from cash flows but disclosed in notes.

·         Interest/dividends may be classified as operating, investing, or financing (choice allowed, but consistency required).

·         Cash equivalents = short-term, highly liquid investments (<3 months maturity).

2. FAQ

1. Q: What is the purpose of a Cash Flow Statement?
   A: To show how cash is generated and used in operating, investing, and financing activities.
2. Q: What are the three main sections of a cash flow statement?
   A: Operating, Investing, and Financing activities.
3. Q: What is the indirect method?
   A: It starts with net profit, then adjusts for non-cash items (depreciation, provisions) and working capital changes to arrive at operating cash flows.
4. Q: How are non-cash transactions presented?
   A: Not included in cash flows, but disclosed in notes (e.g., acquiring assets via loan).
5. Q: Where should dividends paid be classified?
   A: Under Financing Activities (though interest/dividends received/paid may vary, consistency is key).
6. Q: How do cash and cash equivalents differ?
   A: Cash = cash on hand and bank balances; equivalents = short-term, highly liquid investments readily convertible to cash.
7. Q: Why is cash flow more reliable than profit in liquidity analysis?
   A: Because profit includes non-cash items, while cash flow shows actual liquidity available for obligations.