Cash & Cash Flows Flashcards
CHAPTER 18
Key objectives of cash management
Liquidity, Profitability, Security
Cash
- Petty cash
- Bank current a/c balance,
- Marketable securities (can be converted easily into cash)
- Unused portion of overdraft
Cash flow
Movements of funds into & out of a business
Working capital
Current asset - Current liability
WCC
Time between cash outflow for material & cash inflow from customer
Payment to supplier of finance :
- Drawings (sole trader/partner)
- Interest (debentureholder, bondholder, banks)
- Dvidends (shareholder)
–> dividend – paid twice a year
Cash received from providers of finance :
- Equity share capital
- Long-term loans
Operational cash flow
Difference between cash received & cash paid
= Cash in - Cash out
Negative cash flow : Causes
- Spend on NCA purchases on
- Pay business acquisitions
- High inflation
- Dividend > Cash surplus
- Debt repayment
Advantages of cash flow accounting
Lender : See entity’s ability to repay
Management : Information for decision making (relevant cost is cash flow, not profit)
Shareholder & auditor : Stewardship accounting [ financial info abt resources u control but not own ]
–> Cash flow are easier to prepare & more useful than profit forecast
What is working capital
Trading asset
The current assets needed for a business to sustain operations
Working Capital Cycle
Masures the amount of time for cash used for working capital to be converted back into cash
3 types of cash flow
- Operating
- Financing
- Investing
Operating cash flow
Associated with the operations of the entity
Investing cash flow
Associated with non-current assets of the entity
Financing cash flow
Associated with the entity’s financing
Examples of operating cash flow
- Cash from sales
- Cash from expenses (wages, rent, taxes)
- Cash from non-current asset (rent, royalties)
Examples of investing cash flow
- Cash from disposal of NCA
- Payment for purchase of NCA
Examples of financing cash flow
- Cash received from
a) loan
b) issue of shares
c) capital introduced by owner - Cash out to
a) Owners (Drawings)
b) Shareholder (Dividends)
c) Service loans
What is economic trend
General long-term direction in which the economy moves
What is GDP ?
Gross Domestic Product
Net output of an economy. It is the total monetary value of all the goods and services produced by the examined economy and is usually net of exports and imports.
4 stages of Economic Cycle
- Boom
- Recession
- Slump
- Recovery
Another name for boom
Peak
Another name for recession
Contraction
Another name for slump
Depression, trough
Another name for recovery
Expansion
Managements during economic downturn
- Re-examine value provided to customer
- Examine expenses
- Rebalance workforce
- Ensure line of credits are available
- Maintain strong relationships with provider of funds
- Invest in areas that will create sustainable advantage and ensure company growth when the economy improves
