Question 1

Nice'n'easy which is a trading business operating on a cash only basis has an operating profit of £30000 after charging depreciation of £4000 and has an increase in inventory of £5000. What is its cash flow from operations?

A) £21000
B) £39000
C) £31000
D) £29000

D

Accepted Answer

D

Question 2

Getting-Harder has an operating profit of £40000 after charging depreciation of £5000 and has a decrease in inventory of £7000 and an increase in receivables of £3 500. What is its cash flow from operations?

A) £51000
B) £48500
C) £40500
D) £33500
E) £36500

B

Accepted Answer

Cash flow from operations can be calculated using the formula:

Operating Profit + Depreciation - Increase in Receivables + Decrease in Inventory

= £40000 + £5000 - £3500 + £7000

= £48500

Therefore, the correct answer is B.

Question 3

All the information that is in the cash flow statement can be derived from the other financial statements and the notes to the accounts.

Accepted Answer

The cash flow statement is derived from the balance sheet, income statement, and the notes to the accounts, reflecting how changes in balance sheet accounts and income affect cash and cash equivalents.

Question 4

Cash flow statements are seen as more important than income statements by bankers.

Accepted Answer

Cash flow statements show the inflows and outflows of cash in a business, giving a more accurate picture of its financial health and ability to repay loans. Income statements only show revenue and expenses, which may not necessarily reflect actual cash movements. Therefore, bankers usually prioritize cash flow statements in their analysis of a company's financial statements.

Question 5

What effect have the transactions set out above in respect of loans had on Expansion's financial risk?&#10;A) Increased the gearing and financial risk&#10;B) Decreased the gearing and financial risk&#10;C) Had a neutral effect

Accepted Answer

The transactions related to loans show that Expansion has increased its borrowing, leading to higher gearing (debt-to-equity ratio). This indicates that Expansion has taken on additional financial risk, as higher levels of borrowing can result in greater vulnerability to economic fluctuations and higher interest expenses.

Question 6

Borrowit had a cash flow from operations of £56000 and during the year bought fixed assets for £84000, introduced £42000 new equity capital, took out a new loan and had a net cash flow of £36000. What was the amount of the new loan ?

A) £8000
B) £36000
C) £50000
D) £92000

Accepted Answer

The answer of Borrowit had a cash flow from operations...

Question 7

The sale of fixed assets has no impact on the cash flow statement.

Accepted Answer

The sale of fixed assets results in cash inflow, which is shown in the cash flow statement as a source of cash under the "Cash inflows from investing activities" section.

Question 8

A business can be profitable but have negative cash flows.

Accepted Answer

This is possible because cash flows are based on the actual cash coming in and going out, while profits are based on accounting principles and include non-cash expenses such as depreciation. A business can have a positive net income (profit) but still have negative cash flows due to factors such as delayed payments from customers, large investments in fixed assets, or high amounts of debt repayment.

Question 9

Cash flow statements provide useful information about the nature of cash flows.

Accepted Answer

Cash flow statements provide detailed information about the inflow and outflow of cash in an organization, including its operating, investing, and financing activities. This information is helpful in analyzing the financial health of the organization and making investment or strategic decisions. Therefore, the statement is considered useful in providing valuable insights about the nature of cash flows.

Question 10

An increase in payables will mean that the cash flow from operations is lower than the profit figure.

Accepted Answer

An increase in payables means that a company is taking longer to pay its suppliers, which actually increases cash flow from operations because it is retaining cash longer.

Question 11

A decrease in receivables will mean that the cash flow from operations is higher than the profit figure.

Accepted Answer

The answer of A decrease in receivables will mean that...

Question 12

Cash flows are just another name for revenue and expenses.

Accepted Answer

The answer of Cash flows are just another name for...

Question 13

Flogemoff had a cash flow from operations of £48000 and during the year bought fixed assets for £42000, introduced £21000 in new equity capital, sold assets with a carrying value of £36000 resulting in a paper loss of £6000. What was the net cash flow ?

A) £27000
B) £57000
C) £63000
D) £69000

Accepted Answer

The answer of Flogemoff had a cash flow from operations...

Question 14

Depreciation has the same effect on cash flows as it does on the income statement.

Accepted Answer

The answer of Depreciation has the same effect on cash...

Question 15

Inventory increases are added to profit to arrive at the operating cash flow.

Accepted Answer

The answer of Inventory increases are added to profit to...

Deck 10: Cash Flow Statements