Chapter 8: (things idk) Flashcards
why is cash important to external stakeholders
A business cannot meet the expectations of external stakeholders without sufficient cash to operate + grow the business
Why does internal stakehodlers monitor cash
to see if they need to raise more cash
Why does external stakehodlers monitor cash
To see if company is investing moneey to pay dividends + fund future growth
What is the ‘cash flow’ statement?
To understand how cash is generated + used during a period
What is the equation for the cash flow statement?
Cash flow from/for operating activities
+
Net cash flow from/for investing activities
+
Net cash flow from/for financing activities
=
Net increase (or decrease) in cash for the period
+
Cash balance at beginning of period
=
Cash balance at end of period
What are operating activities
Activities relating to core activities in the business
what are examples of ‘operating actitvities’?
+ cash recieved from goods and services sold
+ cash used to pay suppliers
What are investing activities?
- Activities related to purchasing or disposing of PP&E
- Investments that are not cash equivalents or held for trading
- Acitivites relating to cash advance to other areas
what are examples of ‘ investing actitvities’?
- Cash used to purchase a manufacturing facility
- Dispose of equipment
- Lend money to others
What is the financial acitivites
Business activities related to raising capital
What are examples of finance activities?
Borrowed cash received from a bank.
Cash is used to repay a bank loan.
Cash received from an investor in exchange for company shares.
Cash is used to pay dividends to shareholders.
Cash is used to buy back shares.
What is the accounting policy choice under IFRS for how to present interest and dividends?
Dividends and interest received - operating and investing
Dividends and interest paid - Operating and financing
Explain the equation from/for operating activities
Net income
+/-
Non-cash items
+/-
Changes in current assets
+/-
Changes in current liabilities
What are noncash items
- Depreciation (add to net income)
- Gain or loss on asset disposal (remove gain, add loss)
What are the changes in current assets?
a. Remove increases in current assets from net income
b. Add decreases in current assets to net income
What are the changes in current liabilities?
Add increases in current liabilities to net income
b. Remove decreases in current liabilities from net income
Major sources of cash
Look at inflow
Major uses of cash
Look at outflow
What are the two ratios a company looks at for ‘liquidity’
Current ratio
Quick Ratio (acid)
What is current ratio?
current ratio = current assets / current liabilities
It measures a companies ability to pay ‘current obligations’
What is a rule of thumb for ‘current ratio’?
A ratio greater than 1 indicates company has enough assets to cover all its current obligations in short term
What is a quick acid test ratio? (current asset less invetory/ current liabilities)
Measures a companies ability to pay current obligations without selling their inventory.
What is a rule of thumb for the quick acid test ratio? (current asset less invetory/ current liabilities)
ratio exceedign 1 implies company can pay its current liabilities wihout selling inventory
What is the ‘cash conversion cycle’?
Its the number of days it takes for a company to convert inventory + sales into cash
Cash conversion cycle?
Days in inventory + days in accounts recievable less days in accounts payable
What is the equation for the cash conversion cycle?
Day in invetory + Days in A/r - Days in a/p
What is the inventory turnover ratio?
(inventory turnover = COGS / Average inventory)
Measures a companies effectiveness to sell its inventory throughout the period
Is this ratio higher better?
yes if compared to its compeitiors
What is the DIO (365/Inventory turnover)?
Its how much on average inventory we can sell in days.
Whay if we were calculating inventory turnover for a month
Divide by 31 or 30 days in a month to calculate DIO
What is Accounts recievable turnover ratio? (a/r turnover = net credit sales (total revenue) / average a/r)
Measures a companies effectivenes in sollecting its a/r.
Is a/r turnover ratio better higher?
Higher = better
A/P turnover ratio (COGS/average ap)
measures a companies effectiveness in paying its creditors for a specificed period
Can we convert this into days
YES
Should this be lower or higher
They prefer this to be lower as companies prefer to collect recievables quickly but make payments slowly
What are solvecy ratios
This shows a companies ability to tae on addtioal debt in the future
What are the two solvency ratios
Debt ratio
TIE ratio
What is debt ratio? (tota liabiliites / total assets)
Measures how much compnies assets are financed by debt
What is a rule of thumb for debt ratio
1 = implies all assets are financed by debt
0.5 - half assets are financed by debt
What are TIE ratio?
Measures the number of time a company can pay its intrest expense with the operating income it generates
Is higher = better for TIE ratio
yes it shows were able to pay our intrest obligations through normal operations
