Chapter 12 Exercise Reviews Flashcards
State one reason why the owner should be unhappy with the cash performance of the firm
The business has suffered a Cash Deficit of $5 700, reducing its Bank balance.
only statement of receipts and payments prepared
Explain one way to improve the information reported to the owner about the firms cash performance
By preparing a Cash Flow Statement, which shows the sources and uses of funds by classifying cash flows as Operating, Investing or Financing activities
Operating Activities
Cash flows related to day to day trading activities
Investing Activities
Cash flows related to the purchase and sale of non-current assets
Financing Activities
Cash flows related to changes in the financial structure of the firm
Explain your treatment of drawings
Classified as a Financing Outflow as it is a cash flow related to a change in the firm’s financial structure (i.e. it decreases Owner’s Equity)
Explain one reason why the owner made the capital contribution of $10 000
To keep the bank balance out of overdraft
To help fund the purchase of the display cabinets
Explain one benefit of preparing a cash flow statement rather than a statement of receipts and payments (3)
It aids decision-making by classifying sources and uses of funds, allowing the owner to identify whether Net Cash Flows from Operations is sufficient to cover other cash requirements.
It aids decision-making by allowing the firm to assess its performance in meeting its cash targets.
It assists in planning for future cash activities by providing a basis for cash targets for the future (in the next Budgeted Cash Flow Statement).
cash surplus but negative operating cash flow
Explain one reason why the owner should be concerned about the firms cash performance for the reporting period
Net Cash Flows from Operations is negative, meaning the business is generating insufficient funds from its Operating activities to meet its other cash requirements. If not for the loan, the bank overdraft would have fallen into overdraft
Explain your treatment of Accrued Interest Paid in the Cash Flow Statement
Classified as an Operating outflow as it is a cash flow related to the firm’s day-to-day trading activities
Explain the importance of Net Cash Flows from the Operations to the success of a trading business
If Net Cash Flows from Operations are negative, the firm will be unable to meet its other cash requirements without using other sources of finance, such as loans which must be repaid or capital which is limited to the funds of the owner.
Explain your treatment of discount expense
It is excluded from the Cash Flow Statement altogether as it is a non-cash expense. It involves a decrease to Debtors Control rather than Bank.
Explain why GST received and GST Refund must be reported separately in the cash flow statement (3)
Received from different entities (customers v. ATO)
Recorded in different columns in the Cash Receipts Journal (GST v. Sundries)
May relate to different Reporting Periods (current v. previous)
Explain why the GST paid on a non-current asset is not reported as an investing activity
All GST cash flows are reported as Operating activities as all GST paid to suppliers, whether for current or non-current assets, is recorded in the GST column of the Cash Payments Journal.
Suggest 3 ways the purchase of the new vehicle may have been financed
Existing cash reserves/overdraft
Net Cash Flows from Operations
Loan/Capital contribution
Explain how negative net cash flows form investing activities may lead to a reduction in net profit
It increases non-current assets, so Depreciation expense will increase, leading to a reduction in Net Profit.
Explain how a positive from net financing activities may lead to a reduction in net profit
If it involves the receipt of a Loan, Interest expense may increase, leading to a reduction in Net Profit.
Explain why capital contribution is not reported in the income statement
It is expressly excluded from the definition of revenue as it not earned as a result of the activities of the business but rather the owner.
State one reason why the total of the debtors control column in the cash receipts journal does not equal receipts from debtors
The Debtors Control column includes the cash received from debtors plus the discount expense
Explain why the owner should be concerned about the firms cash position but less concerned about its cash performance in August
The cash position is concerning because the Bank Balance at End is in overdraft, but the positive Net Cash Flows from Operations and Net Increase in Cash Position show positive cash performance in August 2015
Explain how a business can increase cash but suffered a net loss
Capital Contribution
GST Received was greater than GST Paid.
Receipts from Debtors was greater than Credit Sales.
Capital Contribution is a cash inflow, which increased Net Cash Flows but is not a revenue and so had no effect on the Net Loss. Receipts from Debtors (cash inflow) increased Net Cash Flows by more than Credit Sales (revenue) increased Net Profit (or decreased the loss).
Explain how the cash flow statement can aid decision making
The Cash Flow Statement allows the owner to identify sources and uses of cash, and assess whether the business is generating sufficient Operating cash. This will help to identify problem areas so corrective action can be taken
Explain how a business can decrease cash but have a net profit
Polishing equipment
Repayment of loan
Accrued wages paid
GST paid more than GST received
Prepaid insurance/Payments for stock are greater than Cost of Sales
Cash outflows such as repaying a loan/purchasing polishing equipment decrease Bank but are not expenses so do not affect Net Profit in that Reporting Period. Payments for stock ($40 700) are cash outflows that decrease Bank more than the Cost of Sales ($23 500) expense decreases Net Profit.
Net loss and Cash surplus
Loan
Capital Contribution
Stock sold (COS) but unpaid
Depreciation of Office Furniture/Advertising
Expense/Interest Expense unpaid
Loan/Capital Contribution are cash inflows that increase cash but are not revenue so do not affect Net Profit. Depreciation/Advertising /Interest (accrued) are expenses that decrease Net Profit but are not cash outflows and so do not affect cash.
The bank overdraft increased despite an increase in the net cash flows of operating activities, explain how this could have occurred
Cash Purchase of Shelving
Cash Drawings
Both these cash outflows increase the Bank overdraft, but are classified as Investing and Financing activities, respectively, and so have no effect on Net Cash Flows from Operations.
Explain one benefit of a cash flow statement
It aids decision-making by classifying sources and uses of funds, allowing the owner to identify whether Net Cash Flows from Operations is sufficient to cover other cash requirements.
It aids decision-making by allowing the firm’s to assess its performance in meeting its cash targets.
It assists in planning for future cash activities by providing a basis for cash targets for the future (in the next Budgeted Cash Flow Statement).
net cash flows form operating is negative
Explain hwy the owner must be concerned about the firms net cash flows from investing activities
Net Cash Flows from Operations is negative so the firm cannot meet its Investing and Financing cash requirements without additional loans (which must be repaid) or capital (which is limited to the funds of the owner).
Discussion of cash flow statement
Net Cash Flows from Investing Activities is negative, which will mean pressure on/a reduction in the firm’s bank balance. However, negative Investing cash flows may be expected if the business is purchasing new non-current assets, and positive Financing cash flows may be due to loans or a capital contribution to finance these assets. Further, more or better non-current assets may generate more sales, and more cash.
Net profit despite net cash flow decrease
Credit Sales is greater than Receipts from Debtors.
Prepaid Insurance
Payments to Creditors is greater than Cost of Sales.
Credit Sales is revenue and so increases Net Profit by more than Receipts from Debtors increases Net Cash Flows from Operations. Prepaid insurance is a cash outflow, which decreases Net Cash Flows from Operations more than Insurance expense decreases Net Profit.
*Explain what is meant by Cash Flow from Operating Activities
Cash derived from the business conducting its day to day trading activities such as buying and selling of stock and paying expenses
*Net profit for the quarter was $3650, although Net Cash from Operating Activities was negative, explain giving one example how this can occur
Only cash inflows and outflows related to day to day trading activities are included in the calculation of Net Cash from Operating Activities, whereas the Net Profit is the result of revenues earned minus expenses incurred
Cash flows from operating activities and net profit measure different information.
For example, Credit sales may be greater than Receipts from debtors which could increase net profit more than operating cash flow
*Discount Revenue and Sales are both reported as revenues in the income statement
Explain how each meets the definition of revenue
Sales is a revenue as it results in an inflow of economic benefits that increase Bank or Debtors Control and lead to an increase in Owners Equity
Discount Revenue is a revenue as it results in a saving in outflows of economic benefits to creditors. That is a reduction in the payment to creditors that leads to an increase in Owners Equity
