Essay about value chain analysis

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ACCG 923 Accounting Standards and Practice
Cash flow statements (Homework)
Chapter Fourteen
Review Questions
1.

What are the purposes of the statement of cash flows?

The purpose of a statement of cash flows is to provide information about the historical changes to an entity’s cash and cash equivalents. It is designed to provide users of GPFRs to assess the ability of the entity to generate cash and the needs of the entity to use cash.
According to paragraphs 4-5 of the standard AASB 107, the statement of cash flows, when used in conjunction with the other financial statements will benefit users in that it will enable them to:
 Evaluate the changes in net assets of the entity
 Evaluate the entity’s financial structure, including its liquidity and solvency

Evaluate the entity’s ability to adapt to changing circumstances and opportunities

Assess the entity’s ability to generate cash in the future and enable predictions of future cash flows to be made

Compare the performance of this entity with other entities because it eliminates the effects of using different accounting treatments (for example depreciation methods) for the same transactions and events
 Check the accuracy of past assessments of future cash flows, and
 Examine the relationship between profitability and net cash flow
The statement of cash flows can also provide useful information to internal users such as managers in their planning and controlling operations.
2.

What is the concept of cash used in the preparation of the statement of cash flows?
Why is defining cash important?

The concept of cash adopted by AASB 107 covers both cash and cash equivalents. Note the definitions of “cash” and “cash equivalents” in the standard. Note also from paragraph 8 of the standard that certain borrowings (e.g. bank overdrafts) may be included in the definition of cash equivalents if they are repayable on demand and form an integral part of the entity’s cash management function.
The definition of “cash and cash equivalents” is important, as an item included in this concept cannot generate a cash flow and therefore is not reported in the statement of cash flows. That is, increasing a bank balance with funds from a short-term bank bill doesn’t generate a cash flow, whereas decreasing a bank account to purchase machinery is a cash flow.
3.

Indicate whether the following items are cash flows under AASB 107:
(a) increase in bank overdraft
(b) cash loans to employees
(c) proceeds from sale of investments
(d) depreciation of plant
(e) income tax paid
(f) sale of motor vehicle for cash
(g) issue of ordinary shares in exchange for convertible notes

(h) bad debts written off
(i) bad debts recovered
(j) bonus share dividend issued from the general reserve
(k) transfer from general reserve to retained earnings
(l) dividend declared
(m) cash dividend paid to shareholders.
Items (b), (c), (e), (f), and (m) are cash flows. The cash received from recovering a bad debt
(i) would also be a cash flow included in the receipts from customers, whereas the remaining items would not be considered cash flows. Item (a) may be a cash flow if bank overdraft is not included in the definition of cash.
9. Explain the differences between the direct and indirect methods of determining cash flows from operating activities.
The direct method of determining cash flows from operating activities shows directly the cash flows from receipts from customers and for payments to suppliers and employees. The indirect method merely adjusts the profit for the period for non-cash flows and for changes in the balances of current assets and liabilities in order to determine the cash flows from operations. The final answer for cash flows from operating activities is the same.
Nevertheless the indirect method does not show the sources of the cash flows but merely provides a calculation reconciling the entity’s profit with operating cash flows.
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