ACF Topic 9 - Cash Flow Statements

theory

Statement of Cash flows

• shows the cash inflows and outflows of a company for a period of time

• AASB 107 Statement of Cash Flows, sets the layout for the statement, including definitions of key terms and guide classifications

Purpose of Statement of Cash Flows

• identify the source of cash (inflows)

• identify how the company spent its funds (outflows)

• explain how cash and cash equivalents changed over the period

• see if there is surplus funds for the business to use in the future

• assess the liquidity and solvency of the company

• assess the ability of a company to generate net cash flows

• assess the ability of a company to pay its short term and long term debts

• predict future cash flows

• check the accuracy of past assessments

• compare the cash generating ability of different companies

Cash

• any cash on hand which is held in the business, and demand deposits

• demand deposits are called ‘at call’ deposits, and are bank accounts that provide businesses access to their funds on demand

Cash equivalents

• short-term, highly liquid investments that have terms of three months or less

• investments made to finance short-term cash needs in the business

• highly liquid means that investments are easy to access and at low risk

Operating activities

cash flows that arise from the main revenue raising activities of the business

Investing activities

cash flows arising from purchase and sale of non-current assets and investments

Financing activities

cash transactions that change the share capital or borrowings of a company