Topic 7: Cash Flow Management

Question 1

What is the relationship between financial statements

Answer 1

The Cash flow statement relates to the Balance sheet through the Cash Account

Question 2

What does the Cash Flow statement do?

Answer 2

Provide details of movements in an entity’s cash balance over a specific time period.

Question 3

What are the categories for Cash flows? (3)

Answer 3

• operating activities
• investing activities
• financing activities

Question 4

What cash flows are associated with operating activities?

Answer 4

Cash flows related to main revenue producing activities

Question 5

What are some Examples of Operating Activities? (4)

Answer 5

• Sale of Good sand services
• Interest or dividends received
• Operating expenses (Supplies, wages)
• Taxes and interest payment

Question 6

What information does the cash flow from operating activities provide?

Answer 6

Provides users with important information about the ability of the business to generate positive cash flows from its business activities

Question 7

What cash flows are associated with Investing activities?

Answer 7

Cash flows related to the sale and acquisition of noncurrent assets and investments (shares)

Question 8

What are some Examples of investing activities? (2)

Answer 8

• Acquisition and sale of land, plant, equipment

- Acquisition and Sale of shares (investments)

Question 9

What information does the cash flow from investing activities provide?

Answer 9

Provide users with important information about asset investment strategy and thus can provide ‘signals’ about future revenue growth

Question 10

What cash flows are associated with financing activities?

Answer 10

Cash flows related to changing the size and/or composition of the financial structure

Question 11

What are some Examples of financing activities?(3)

Answer 11

• Issuing Shares
• Acquiring/Repaying Borrowings
• Dividend Distributions

Question 12

What information does the cash flow of financing Activities provide?

Answer 12

Provide users with important information about how companies fund their operations (debt/equity)

Question 13

Why is the Cash flow statement important?(2)

Answer 13

• shows movements in cash flows.

- informs the user of the business’ cash position

Question 14

What things do we need to consider when interpreting a Cash-flow statement? (4)

Answer 14

• Market Conditions
• Changes in working capital over time
• Change in financial ratios over time
• Where the business is in its life cycle

Question 15

What is Working Capital Management?

Answer 15

a business strategy designed to ensure a company uses its current assets and liabilities effectively

Question 16

How do you calculate Net Working Capital

Answer 16

Net working capital = current assets – current liabilities

Question 17

What If working capital is too low

Answer 17

suggest a company may not be able to pay its financial obligations

Question 18

What If working capital is too high

Answer 18

may be a poor use of company resources

Question 19

What is the Cash Conversion Cycle?

Answer 19

Assesses the time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales

Question 20

What is the equation for the Cash Conversion Cycle?

Answer 20

Cash conversion cycle = Days inventory outstanding + debtors days – accounts payable days

Question 21

How can we improve the cash conversion cycle? (3)

Answer 21

1. Reduce days in inventory (sell inventory faster)
2. Reduce debtor’s days (accounts receivable days, speed the collection of cash from debtors)
3. Increase accounts payable days (extension on accounts payable)