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Extract from Syllabus: 8.8 Cash Flow Statements

Learn about the significance of cash flow statements, the distinction between profit and cash, different sources of cash inflows and outflows, and the impact of working capital movement on cash flows. Also, explore how to prepare simple cash flow statements.

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Extract from Syllabus: 8.8 Cash Flow Statements

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  1. Extract from Syllabus: 8.8 Cash Flow Statements The student is introduced to: The importance of cash flow statements The distinction between profit and cash The distinction between items that do and do not involve the movement of cash The different sources of cash inflows and outflows The impact of the movement in working capital on cash flows The preparation of simple cash flow statements

  2. Cash Flow StatementAims To highlight all cash inflows/outflows of a business for a stated period of time. Identify the difference between making a profit and a Net Cash Increase /decrease.

  3. 3 Activities give rise to Cash Inflow/Outflow

  4. Preparation of Cash Flow Statements • FRS1Revised (1996) requires C.F.S. be prepared under certain Standard Headings and in a set sequence. • Three Statements must be prepared - Reconciliation of Operating Profit to Net Cash Flow from Operating Activities. - Cash Flow Statement. - Reconciliation of Movement in cash to Movement in Net Debt.

  5. Suggested Teaching Methodology • Get students to identify Cash Inflows and Outflows and their effect on profit from some simple examples e.g. - Paid wages €2,800 by cash. - Bought motor vehicles €16,000 by cheque. - Bought goods €2,100 cash, on credit €1,900.

  6. Calculate the change in net cash and net debt

  7. Layout of Cash Flow Statement • Headings are given at Ordinary Level. • Students need to use the exact wording for both headings and entries e.g. Tax paid

  8. Approach to tackling a question • Calculate the change in net cash and net debt before starting question proper. • For Higher Level, students may need to calculate the amount of dividends, tax and interest paid. • Notes also for -Fixed Assets, Depreciation of fixed Assets and Disposal account.

  9. Cash Flow Statement • Prior Knowledge - be familiar with Final Accounts and all adjustments for fixed Assets. • Year 2. • Ordinary level question using Template. • Higher Level 60 mark. • Higher level 100 marks.

  10. Cash Flow StatementsMost Common Mistakes • Exact wording necessary in all cases. Interest Paid, Dividends Paid Increase in Stock ( not ↑ Stock ) • Miscalculate Loss / Profit on Sale. • Miscalculate Depreciation. • Reconciliation of Net Cash flow to movement in Net Debt. 2012 Q7 (b) (i) – Explain why earning profit does not always result in a corresponding increase in cash balances. Use figures from this question to support your answer.

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