Lecture 10: The Statement of Cash Flows

Vocabulary flashcards covering the key concepts, activity classifications, and ratios from the Lecture 10 transcript on the Statement of Cash Flows.

Statement of Cash Flows (CFS)

A financial statement that summarizes cash receipts and payments to indicate a company’s financial health and its ability to expand, replace assets, take advantage of market opportunities, and pay dividends.

Operating Activities

The principal revenue-producing activities of an entity and other activities that are not investing or financing activities.

Investing Activities

Activities related to the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Financing Activities

Activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

AASB 107

The specific accounting standard that outlines the requirements for the Statement of Cash Flows.

Interest received and dividend received

Items that can be classified as either operating or investing activities.

Interest paid and dividend paid

Items that can be classified as either operating or financing activities.

Significant Non-cash Activities

Financing and investing activities that do not affect cash, such as the conversion of debt into ordinary shares or the exchange of property, plant, and equipment; these are reported in the notes rather than the body of the CFS.

Liquidity Crisis

A situation where a business might not have sufficient funds to meet its expenses due to deferred collection of sales revenue, even if accrual-based profit appears sound.

Champagne glass effect

The divergence between Net Income and Cash from Operations (CFO) over a long period of time.

Quality of Income Ratio

A ratio measured as $\frac{\text{Cash Flow from Operating Activities}}{\text{Net Income}}$ which indicates the portion of income generated in cash.

Direct Method

A format for reporting operating activities that lists the cash effects of each specific operating activity.

Indirect Method

A format for reporting operating activities that starts with accrual net income and converts it to a cash basis through adjustments; this method is noted as not examinable in IFA1.