3.7 Cash flow

Question 1

Bad debts

Answer 1

exist when debtors are unable to pay their outstanding invoices (bills), which reduces the cash inflows of the vendor (the firm that has sold the products on credit

Question 2

Cash

Answer 2

is a current asset and represents the actual money a business has. It can exist in the form of cash in hand (cash held in the business) or cash at bank (cash held in a bank account).

Question 3

Cash flow

Answer 3

Refers to the transfer or movement of money into and out of an organisation

Question 4

Cash flow forecast

Answer 4

Is a financial tool used to show the expected movement of cash into and out of a business, for a given period of time

Question 5

Cash flow statement

Answer 5

is the financial document that records the actual cash inflows and cash outflows of a business during a specific trading period (usually 12 months)

Question 6

Cash inflows

Answer 6

Refer to the cash that comes into a business during a given time period, usually from sales revenue when customers pay for the products they have purchased.

Question 7

Cash outflows

Answer 7

Refer to cash that leaves a business during a given time period, such as when invoices or bills have to be paid

Question 8

The closing balance

Answer 8

refers to the amount of cash left in a business at the end of each trading period (usually 1 month), as shown in its cash flow or forecast statement. It is calculated using the formula:

closing balance =
opening balance + net cash flow

Question 9

Credit control

Answer 9

is the process of monitoring and managing debtors, such as ensuring only suitable customers are permitted trade credit and that customers do not exceed the agreed credit period.

Question 10

Net cash flow

Answer 10

refers to the difference between a firm’s cash inflows and cash outflows for a given period of time, usually per month

Net cash flow =
total inflow - total outflow

Question 11

Opening balance

Answer 11

refers to the value of cash in a business at the beginning of a trading, as shown in its cash flow forecast or cash flow statement. It is equal to the closing balance in the previous month.

Question 12

Overtrading

Answer 12

Occurs when a business attempts to expand too quickly without the sufficient resources to do so, usually by accepting too many orders, thus harming its cash flow

Question 13

Profit

Answer 13

is the positive difference between a firm’s total sales revenue and its total costs of production for a given time period.

Question 14

Working capital cycle

Answer 14

Refers to the time between cash outflows for production costs and cash inflows from customers who pay upon receipt of their finished goods and services,