3.3.2 Monitoring and controlling- cash flow statement, income statement, balance sheet

Question 1

What are the three types of significant financial statements?

Answer 1

• Cash flow statements and cash flow forecasts
• Income statement (or revenue or profit and loss statement)
• Balance sheet, which business now refer to as the statement of financial position

Question 2

What is cash flow?

Answer 2

Cash Flow is the difference between cash inflows (money coming into the business) and cash outflows (money going out of the business). For a business to survive it is necessary to have more cash inflows than cash outflows.

Question 3

Outline the role of a cash flow budget?

Answer 3

A cash flow budget helps a business to predict the cash inflows and cash outflows over specified periods of time, usually for periods of one too three months.

Question 4

In regard to cash flow, why is it important that a business plan ahead?

Answer 4

By planning ahead a business can respond appropriately to periods of lower cash inflows and periods of excess cash.

Question 5

Why is close monitoring of a cash flow statement important?

Answer 5

Close monitoring of the cash flow position is important so that the business can meet its short term financial commitments and take advantage of excess cash periods to assist the growth and profit of the business. Maintaining an adequate cash flow is a major goal of any business

Question 6

What is a cash flow statement?

Answer 6

The cash flow statement is an important financial report that forecasts the monthly cash inflows and outflows of the business. This statement helps businesses managers meet their financial obligations and respond to periods of cash shortages and surpluses

Question 7

Explain the role of an income statement

Answer 7

The income statement (also profit and loss) outlines the level of revenue (sales), costs of goods and operating expenses, and calculates where a business has made a profit or loss over a particular period of time, usually a year

Question 8

What is sales revenue?

Answer 8

=all goods sold

Question 9

What is cost of goods sold (COGS)

Answer 9

=(OPENING STOCK+PURCHASES) - CLOSING STOCK

Question 10

What are expenses?

Answer 10

Expenses= total operating costs of the business

Question 11

What is gross profit?

Answer 11

=sales revenue- COGS

Question 12

What is net profit?

Answer 12

Net profit= gross profit- expenses

Question 13

What is a balance sheet?

Answer 13

The balance sheet is a statement showing the financial position of a business at a particular point in time (usually 30th June). The balance sheet shows the short- and long-term assets and the equity (capital provided by the owners).

Question 14

Why are balance sheets important?

Answer 14

A balance sheet is essential in assessing the level of liquidity, gearing and solvency. This will influence the decisions of financial managers regarding appropriate sources of finance for the business.

Question 15

What are intangible assets?

Answer 15

Intangible assets are assets that are not physical, in that they cannot be seen or touched. The new intangible asset of goodwill, for example, represent the value that a new owner of a business would get, or the contribution to the profitability of the business, because of the rapport that the business has developed with customers in general.

Question 16

What are current assets?

Answer 16

Short term assets that can be changed into cash quickly- within the year- to help pay short term debt

Question 17

Name examples of current assets

Answer 17

Cash at bank, inventory (stock) and accounts receivable (debtors)

Question 18

Outline what is meant by ‘Accounts Receivable’

Answer 18

Amounts owed to the business by people. These people are in debt to the business

Question 19

Outline what is mean by ‘Non-current Assets’

Answer 19

Longer-term assets that are used to assist business production and are used for more than one year

Question 20

Name some examples of non-current assets

Answer 20

Buildings, property, equipment, furniture, computers, motor vehicles

Question 21

Explain ‘Total Assets’

Answer 21

Current Assets + non current assets

Question 22

Define ‘Current Liabilities’

Answer 22

Short-term debts of the business that must be repaid within the year

Question 23

Name some expamples of ‘Current Liabilites’

Answer 23

Overdrafts, accounts payable (creditors)

Question 24

Define Accounts payable (also referred to as creditors)

Answer 24

Amounts the business owes to other people. The business has received trade credit from other businesses and must repay in the short term, usually 30-60 days.

Question 25

Define ‘Non-current Liabilities’

Answer 25

Longer-term debts to be repaid over periods greater than one year

Question 26

Name an example of a ‘Non-current Liabilite’

Answer 26

Mortgages and/or Bank loans

Question 27

Define ‘Total Liabilities’

Answer 27

Current Liabilities + non-current liabilites

Question 28

Define ‘Owners’ Equity’

Answer 28

The investment (capital) contributed by the owners of a business. It is the owners’ share of the total value of the business after debts have been paid. This capital is owed to the owners by the business.

Question 29

What is the accounting equation?

Answer 29

Total equity = Total assets - total liabilities

The accounting equation is fundamental to the accounting framework. The structure of the balance sheet is based on the accounting equation.

Question 30

What does the accounting equation show?

Answer 30

The equation shows the relationship between assets, liabilities and the value of the total equity. The total equity represents the net worth of the business and is calculated by the difference between total assets and total liabilities.