The Statement Of Cash FLow Flashcards
Difference Between Cash & Profit
Profit is the surplus after total costs have been deducted from total revenue.
o PROFIT = Total Revenues – Total Expenses
Cash is money at bank or in hand, readily available for use.
o NET CASH FLOW = Cash In – Cash Out
Cash Flows
- Cash Inflows: All Cash coming INTO the business; all cash receipts
- Cash Outflows: All Cash flowing OUT of the business; all cash payments
- NET CASH FLOW = Cash Inflows – Cash Outflows
The Importance Of Cash
It is important for business’ survival and for taking advantage of business opportunities (e.g. invest and expand). However you have to manage your cash, as it is not good to have idle cash. You have to make cash ‘work hard’ to make it make the company grown.
Cash And Cash Equivalents
Cash is notes and coins in hand and deposits in banks and similar institutions that are accessible to the business on demand.
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes of value.
The Relationship Between The Financial Statements
the SOFP shows the various assets (including cash) and claims (including the shareholders equity) of the business at a PARTICULAR POINT IN TIME.
The statement of cash flows and the income statement explain the CHANGES OVER A PERIOD of two of the items in the SOFP.
The statement of cash flows explains the changes to cash. The IS explains changes to equity arising from trading operations.
Materiality Convention
Where the amounts involved are immaterial, we should consider only what is expedient. This usually means treating an item as an expense in the period in which it is acquired rather than strictly matching it to the revenue in which it creates.
Accruals Convention
Profit is the excess of revenue over expenses for a period, not the excess of cash receipts over cash payments.
Explanation: We have seen that for a particular period, total revenue is not the same as total cash received. Total expenses are not the same as total cash paid.
As a result, profit will normally represent the net cash generated during that period. This is the difference between profit and liquidity.
This approach to accounting goes under accruals accounting. The SOFP and IS are both prepared on the basis of accruals accounting.
“Cash Is King”
This is the belief that money (cash) is are valuable than any other form of investment tool. It also refers to the ability of a corporation or a business to have enough cash o hand to cover its short-term operations.
Accruals accounting means that companies are allowed to “conserve their chickens” so to speak, by considering credit as part of the companies revenue.
