3.3.2 Monitoring and controlling- cash flow statement, income statement, balance sheet Flashcards
What are the three types of significant financial statements?
- 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
What is cash flow?
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.
Outline the role of a cash flow budget?
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.
In regard to cash flow, why is it important that a business plan ahead?
By planning ahead a business can respond appropriately to periods of lower cash inflows and periods of excess cash.
Why is close monitoring of a cash flow statement important?
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
What is a cash flow statement?
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
Explain the role of an income statement
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
What is sales revenue?
=all goods sold
What is cost of goods sold (COGS)
=(OPENING STOCK+PURCHASES) - CLOSING STOCK
What are expenses?
Expenses= total operating costs of the business
What is gross profit?
=sales revenue- COGS
What is net profit?
Net profit= gross profit- expenses
What is a balance sheet?
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).
Why are balance sheets important?
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.
What are intangible assets?
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.
What are current assets?
Short term assets that can be changed into cash quickly- within the year- to help pay short term debt
Name examples of current assets
Cash at bank, inventory (stock) and accounts receivable (debtors)
Outline what is meant by ‘Accounts Receivable’
Amounts owed to the business by people. These people are in debt to the business
Outline what is mean by ‘Non-current Assets’
Longer-term assets that are used to assist business production and are used for more than one year
Name some examples of non-current assets
Buildings, property, equipment, furniture, computers, motor vehicles
Explain ‘Total Assets’
Current Assets + non current assets
Define ‘Current Liabilities’
Short-term debts of the business that must be repaid within the year
Name some expamples of ‘Current Liabilites’
Overdrafts, accounts payable (creditors)
Define Accounts payable (also referred to as creditors)
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.
