THEORY 1 FINANCIAL ACCOUNTING THEORY
2010 Why are Cash Flow Statements prepared?
1) CFS are prepared in order to analyse cash inflows and outflows
2) They are also prepared to emphasise to shareholders etc. that p
3) CFS are used to assess the liquidity of the business and as an a
4) To assist in predicting future future cash flows.
2006 What is a non-cash item?
A non-cash item is an expense or a gain recorded in the P & L A
or increasing the profit but does not involve the movement of cas
Examples include: Depreciation on Fixed Assets, Profit(Loss) on
in the Bad Debt Provision.
2004 Why does Profit not necessarly mean a corresponding incre
1 Some items affect profit but not cash, e.g. depreciation.
2 Some items affect cash flow but have no effect on profit, e.g. pu
3 There is a time delay between the recording of sales and the col
credit sales from debtors.
Financial Reporting Standard No.1 (FRS 1)
FRS 1 requires large companies to prepare Cash Flow Statemen
under the following headings: 1 Operating Activitie
2 Returns on Investm
4 Capital Expenditur
5 Equity Dividends;
6 Management of Liq
Liquid resources are any financial assets other than cash/bank t
convertible into cash. Such resources include Government Secu
2010 Cash Expense: is an expense that reduces both Profit and Cash
Non-Cash Expense: is an expense that reduces Profit but not C
flows and outflows during the previous year.
eholders etc. that profits do not equal cash.
usiness and as an aid to management in financial planning.
orded in the P & L A/C which has the effect of reducing
he movement of cash.
sets, Profit(Loss) on sale of a Fixed Asset, or an increase
orresponding increase in Cash?
ct on profit, e.g. purchase/sale of
of sales and the collection time of
Cash Flow Statement for each period
Returns on Investment and Servicing of Finance;
Capital Expenditure and Financial Investment;
Management of Liquid Resources;
er than cash/bank that are easily and quickly
e Government Securities, short-term deposits and
both Profit and Cash.
uces Profit but not Cash, e.g. depreciation.