Page 255 - F3 -FA Integrated Workbook STUDENT 2018-19

Statement of cash flows

The need for a statement of cash flows

1.1 Why prepare a statement of cash flows?

Whilst an entity may be profitable this does not mean that it will be able to survive. To
survive, an entity needs cash to be able to meet its liabilities. If an entity could not
meet its liabilities it would become insolvent and would not be able to continue to
operate.

Profit is not the same as cash flow.

1.2 Examples of transactions when the cash flow impact differs from the
impact on profit or loss

 Depreciation and amortisation charges do not have a cash flow impact

 Dividends paid by an entity do not affect profit or loss

 Proceeds of a share issue do not affect profit or loss

 Gain or loss on disposal of a non-current asset is not a cash flow

 Cash paid to acquire a non-current asset (e.g. property, plant and equipment)
does not affect profit or loss

 Loan finance raised or repaid does not affect profit or loss

Therefore, it is possible for an entity to be profitable but not have sufficient cash
available to pay its liabilities when they fall due.

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