Financial Accounting Flashcards
Capital Expenditure (2)
Benefits the business for more than one accounting period.
Incurred when a business spends money either to buy non-current assets or add to the value of an existing non-current asset (both benefit future periods).
Revenue Expenditure (3)
Benefits the business for one accounting period only.
An expenditure incurred in running the business on a day-to-day basis.
Classified as cost of sales or expenses in the P&L
These expenditures are ‘expensed’.
Interpret the difference between cash and profit
The P&L records sales revenue when a sale is made irrespective of whether the cash is physically received or paid. This also applies to expenses incurred.
Assets that are bought for long term use are not charged as an expense immediately. They are recorded as a fixed asset in the Balance Sheet and gradually shown as an expense as they are used up (depreciation).
Purchased stock for future resale is not an expense at the time of purchase. These are not recorded as a Cost of Sale until actually sold. They are instead recorded as Stock or Inventory.
Why is Cash ‘King’ in Cash Flow?
Cash is a critical element for business and without cash, businesses cannot: Purchase inventory Pay creditors Pay wages Pay expenses Invest in business development
Why do you need cash flow information?
Business is about money, this means that information about cash is very important.
Without enough and sufficient cash, businesses may become insolvent, which in many cases leads to a state of bankruptcy.
Businesses need to keep careful and accurate records of all the cash they receive and the payments they makes in order to keep track of their cash flow.
What is the purpose of a Cash Flow Statement?
A Cash Flow Statement is a statement that summarises all-cash transactions that a business has received during a period of time, and all cash payments that is made during the same period of time.
Define Cash inflows
Cash inflows: cash transactions that bring money into the business.
Define Cash Outflows
Cash outflows: cash transactions that take money out of the business.
Define Cash Surplus
A cash surplus describes the cash position at the end of the accounting period when the cash inflows exceed the cash outflows.
Define Cash Deficit
A cash deficit describes the cash position at the end of the accounting period when the cash outflows exceed the accumulated cash in the business.
Define Cumulative cash brought forward (b/f)
Cumulative cash brought forward (b/f) is the cash surplus or deficit at the start of the accounting period that has been brought forward from previous period.
Define Cumulative cash carried forward (c/f)
Cumulative cash carried forward (c/f) is the cash surplus or deficit at the end of the accounting period that is carried forward to the next period.
In the preparation of a cash flow forecast, describe the direct method.
The Direct Method is basically a summary of all the entries made in the cash book (cash transactions only).
In theory it is an easy and simple way of preparing a CFS.
In the preparation of a cash flow forecast, describe the indirect method.
The Indirect Method extracts and adapts where necessary the data included in the Profit and Loss Statement and the Balance Sheet (both of which show cash & credit transactions).
As a result, the Indirect Method shows a clear link and a close relationship between the CFS and the Financial Statements and is the method most often used in industry.
How do you improve your cash flow position?
There are many ways in which businesses can improve their cash flow, such as:
1 - Improve Planning
2 - Delaying Capital Expenditures
3 - Postponing payments to creditors/suppliers
4 - Quick Collection from Debtors, which can be by encouraging prompt payment by customers (for example offering discounts for customers who pay within 2 weeks of invoicing)
