3.7 cashflow

Question 1

Assets

Answer 1

Assets are items with a monetary value that belong to a business. They can either be/ixed assets (e.g. machinery, tools and buildings)or currentassets (e.g. cash,stockand debtors).

Question 2

Cash

Answer 2

Cash 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

Cash flowrefersto the transferor movementofmoneyinto and out of an organization. Cash inflows mainly come from sales revenue whereas cash outflows are for items of expenditure.

Question 4

A cash flow forecast

Answer 4

A cash flow forecast is a financial document that shows the predicted future cash inflows and cash outflows for a business during a trading period.

Question 5

Closing balance

Answer 5

Closing balance refers the value of cash left in a business at the end of each month, as shown in its cash flow forecast or statement, using the formula: Closing balance = Opening balance plus Net cash flow.

Question 6

Overheads

Answer 6

Overheads are the costs not directly associated with the production process yet necessary for providing and maintaining business operations, e.g. lighting, rent, security and insurance.

Question 7

Overtrading

Answer 7

Overtrading occurs when a business attempts to expand too quickly without the sufficient resources to do so, usually by acceptingtoo many orders, thus harming its cashflow position.

Question 8

Profit

Answer 8

Profit in its simplest form is the positive difference between a firms total sales revenue and its total costs of production.

Question 9

Stock or inventory

Answer 9

Stock (or inventory) is the physical goods that a business has in its possession for further production, (raw materials and unfinished goods) or for sale (finished goods).

Question 10

Working capital / net current assets

Answer 10

Working capital (or net current assets) is the amount of finance available to a business for its daily operations. It is calculated by current assets minus current liabilities.

Question 11

working capital cycle

Answer 11

The working capital cycle refers to the time interval between cash outflows for costs of production and cash inflows from customers who receive their finished goods and services.

Question 12

Current assets

Answer 12

Current assets are liquid resources owned by a business, i.e. cash, debtors and stocks.

Question 13

Current liabilities

Answer 13

Current liabilities represent the money that a business owes that needs to be repaid within the next twelve months, e.g. overdraft, creditors and taxes

Question 14

Creditors

Answer 14

Creditors are businesses that have sold goods or services on trade credit, so will collect this money from its debtors at a future date.

Question 15

Debtors

Answer 15

Debtors arecustomers who have purchased goodsor services on credit, so owe the business money which is collected at a later date.

Question 16

Expenses

Answer 16

Expenses represent the expenditure in the working capital cycle, i.e. costs of productionsuchassalaries, rent,advertising and distribution.

Question 17

Fixed assets

Answer 17

Fixed assets are illiquid resources owned by a business and are not intended for resale within the next twelve months but are used to generate revenue, e.g.land, vehiclesand trademarks.

Question 18

Insolvency

Answer 18

Insolvency is a situation where a firm’s working capital is insufficient to meet its current liabilities. It can lead to the collapse of the business as creditors will take legal action to recovertheir money.

Question 19

Liabilities

Answer 19

Liabilities are debts owed by a business. Current liabilitiesare short-term debts that need to be repaid within twelve months of the balance sheetdate, e.g. overdrafts. Long-term liabilities, suchas mortgages and bankloans, are repayable overa longer period.

Question 20

Liquidity

Answer 20

Liquidity is the ability of a business to convert assets into cash quickly without a fall in its value.

Question 21

Liquidity problem

Answer 21

A liquidity problem occurs where a business does not have enough cash to pay its current liabilities(short-term debts).

Question 22

Net cash flow

Answer 22

Net cash flow refers to the cash that is left over after cash outflows have been accounted for from the cash inflows, per time period.

Question 23

Opening balance

Answer 23

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