Theory questions Flashcards
What is the nature of cash
Cash is a vital asset required in all businesses as it is the fundamental concept necessary for payments and expenses which allow a business to survive and prosper. Most transactions in a business result in cash - either coming into the business or going out of the business (cash inflows and outflows). It is a significant indication of the health and wealth of the business.
Purpose of a statement of cash flow
A statement of cash flow is a report that shows the movement of inflows and outflows from transactions over a given period of time, generally one year. Therefore, the purpose of a cash flow statement is to understand the performance of the business and therefore determine if there is an adequate cash flow for expected expenses. This can assist managers in planning for the future by forecasting expected receipts and payments to understand business performance and the financial position of the business over a period of time.
Why should a business monitor cash flow?
Businesses should monitor cash flow as it is a considerably important asset required in majority of business processes and the business must have knowledge regarding if they have sufficient funds for desired and required expenses. Six questions businesses may want to ask are:
- Where has the money come from?
- Where has the money gone?
- Does the business have enough cash to make payments on a loan?
- Does the business have enough cash to pay drawings?
- Can the business fund an expansion program or desired changes?
- Does the business have enough cash to pay employees?
Outline the Categories of Cash
There are three categories of cash addressed in a the statement of cash flow. These are operating, investing and financing.
Operating activities relate to the cash inflows and outflows required in the purchasing and selling of goods and services. These result from cash received from revenues and cash paid for expenses as well as money received from accounts receivable and money paid to accounts payable.
Investing activities relate to cash inflows and outflows from a business purchasing and selling non-current assets (long term assets) such as furniture, motor vehicles and buildings. These assets are generally held for more than one accounting period.
Financing activities relate to the cash inflows and outflows from a business borrowing money and or capital contributions by owners and outflows from the business repaying loans and mortgages or drawings of cash,
What is the cash flow statement concerned with?
cash flow statement is only concerned with cash and cash equivalents. For example, cash through cash on hand or cash at bank OR cash equivalents which may be cash invested over short term, bank bills, money market deposits or non-bank bills. Non- cash items are not included in this cash flow statement.
Identify Transactions as Cash Flow or Non Cash Flow & What Activity it Relates To:
- Non- cash Flow: depreciation, selling something on credit, bad debts, signing a contract, bartering (exchanging assets) THESE HAVE NO CATEGORIES
- Cash Flow, purchase of furniture for $1000 cash, accounts receivable
Five types of receipts and five types of payments that could be included in a cash budget?
- Five types of receipts are cash sales, accounts receivable, GST and other receipts such as rent revenue and interest revenue
- Five types of payments include cash purchases, accounts receivable, GST and other payments which may include electricity, advertising and wages
Why is it necessary to use a combination of actual and estimated information to prepare cash budget?
- To adjust to potential future expenses and payments and therefore be able to accurately forecast the business’s financial position
