Theory

Question 1

State the difference between general-purpose and special-purpose financial reports.

Answer 1

General-purpose reports are the external reports eg Income Statement, Balance Sheet, Cash flow statement whereas Special-purpose reports are internal reports which differ according to the firm producing them as they focus on the needs of each individual business eg sales reports, inventory turnover

Question 2

Define financial reports.

Answer 2

The function of financial reports is to communicate information to users in order to facilitate the decision-making process.

Question 3

Define cash flow ratios.

Answer 3

Cash flow ratios focus on the sufficiency of cash to cover cash flow needs and the efficiency of the enterprise to generate cash.

Question 4

State the different ratios for cash flow and a strategy to improve each of these ratios.

Answer 4

Cash flow to revenue ratio:
Strategies to improve:

• Increase cash received from operating activities
• Increase cash sales compared with credit sales
• Introduce EFTPOS facilities
• Improve credit collection rate

Cash flow adequacy ratio:
Strategies to improve:

• Increase cash from operations
• Investigate any apparent increases in cash for assets PPE, drawings or debt repayment

Long term debt payment ratio:
Strategies to improve:

• Increase cash from operations
• Decrease debt

Question 5

State three interested parties of financial reports and state the decision/s which may be made by these interested parties in light of the financial reports.

Answer 5

Investors: Sell, retain or increase their investment
Lenders: Provide, withdraw or refuse future loan requests
Suppliers: Stop, continue or expand credit facility