CASH Flashcards
Explain why reports for cash are prepared from the Bank account in the General Ledger rather than the source documents
Timing of some transactions that appear in the Bank account in the General Ledger might not appear in the Bank Statement until the next Period and vice-versa
Explain why it is important for a business to generate positive Net Cash Flows from Operations
- Generating sufficient cash from its day-to-day trading activities to meet its operating requirements
- Provide cash for Investing and Financing activities
Explain the possible relationship between Net Cash Flows from Investing activities and Net Cash Flows from Financing activities
- negative Investing + positive Financing = purchase of non-current assets is financed by loans and/or capital
- no change Investing + negative Financing: loans being repaid
Explain the purpose of a Cash Flow Statement
- classifies common sources and uses of cash, and separately identifies their effect on the bank balance to aid decision-making
- assists in planning for future cash activities by providing a basis for cash targets in the future
List the strategies to generate cash inflows
- increase sales revenue
- implement strategies to manage Accounts Receivable
- use loans (compare the cost of interest against the long-term benefits generated by the asset) and capital contributions (relies to owner’s fund) to finance the purchase of non-current asset
List the strategies to minimise cash outflows
- Reduce expensesMight have negative impact on Sales (eg low Cost of Sales leads to lower quality of inventory)
- Utilise the credit terms offered by suppliers / negotiate with account payables to extend the payment date
- Reduce cash drawings or loan repayments
- Defer purchases of non-current assets
- Organise a bank overdraft
List four pieces of non-financial information that might inform the management of cash
- the number of expected sales in the next period might affect whether the business is adventurous or cautious with the amount of cash it keeps on hand
- credit rating of an account receivable might affect the credit terms offered and the strictness and speed with which they are enforced
- length and strength of a relationship with an account payable might affect how quickly debts are paid
- the age of existing non-current assets might affect how quickly a new asset is purchased
State what is measured by Cash Flow Cover
A liquidity indicator that measures the number of times Net Cash Flows from Operations is able to cover average current liabilities
State the purpose of Cash Flow Cover ratio
- when to pursue or hold off expansion plans?
- how to imporve their debt mangement strategies?
- whether or not resources are used properly for maximum cash flow?
- for bankers to assess whether they should lend
Explain the effect of discount expense on Cash Flow Statement
Discount expense is EXCLUDED from Cash Flow Statement because it is simply a reduction from cash inflows (non-cash expense) which would be reflected in a lower level of receipts from Account Receivable.
Explain why the GST received and GST refund must be reported separately in the Cash Flow Statement
- The receipts are from different entities (customers v. ATO) and may relate to different reporting Periods (current v. previous)
- GST settlement is paid to the ATO and the only cross-reference is GST Clearing
Referring to one Qualitative characteristic, explain how the valuation of the vehicle contributed by the owner would have been determined
Upholding Relevance, it would be valued at its fair value (the price that would apply in an arm’s length transaction) as this is up to date and most useful for decision-making regarding its replacement.
> Arm’s length transaction: a business deal which buyers and sellers act independently without one party influencing the other (what it would be sold in a market)
Explain the meaning of a negative / less than 1 Cash Flow Cover
A Cash Flow Cover that is less than 1 means that the business is unable to meet current liabilities using only Operating Cash
Explain how Net Cash Flow from Operations is important in evaluating the business cash performance
Over the long term, it is important to achieve a net inflow from operating activities in order to meet the day-to-day commitments of the business
Explain the difference between cash and profit with examples
- Cash and profit are different things. Cash refers exclusively to the inflows and outflows of cash, as reflected in the Cash Flow Statement. Alternatively, profit is calculated by deducting revenues from expenses. Whilst some items affect both cash and profit, this is not always the case.
- One reason cash and profit are different, is that not all cash inflows and outflows are revenues or expenses. For example: the receipt of a loan increases the bank balance of the business, and therefore cash. However, as it has no effect on the owner’s equity of the business, it is not included in the calculation of profit.
- Comparatively, not all revenues and expenses affect cash. For example: an inventory loss decreases assets and owner’s equity, and is therefore an expense, however there is no corresponding cash flow.
- Furthermore, some items affect cash and profit by differing amounts. A credit sale will increase sales revenue and therefore profit. However, the cash collected by the business as a result of that sale may differ, due to factors such as discount expense and GST.
- Therefore, it is clear that whilst cash and profit may be related, they are very different things.
