Unit 2 Acc Chapter 16 Review Questions

Question 1

RQ 16.1 // The Need to Report For CashQ1. Explain the basic function of all accounting reports.

Answer 1

The basic function of all accounting reports is to provide the owner of the business with financial information in order to aid decision-making.

Question 2

RQ 16.1 // The Need to Report For CashQ2. Explain why it is important to report on both cash and profit.

Answer 2

Cash and profit are different measures of performance, and there are many possible reasons why a business that is earning a profit can experience a shortage of cash, or a business may be experiencing a loss yet has cash in the bank. This is why it is important to report on both cash and profit.

Question 3

RQ 16.1 // The Need to Report For CashQ3. Explain the function of the Statement of Receipts and Payments

Answer 3

The function of the Statement of Receipts and Payments is to detail cash received and cash paid during the reporting period, and then identify the change in the firm’s bank balance.

Question 4

RQ 16.2 // The Cash Flow StatementQ1. Define the following terms as they relate to the Cash Flow Statement, and provide an example of inflow and outflow:• Operating activities

Answer 4

• Operating activities: Cash flows related to day-to-day trading activities- Inflow: Cash sales, receipts from debtors,GST received, GST refund,other cash revenues (such as commission or interest received)- Outflow: Cash purchases of stock, payments to creditors, expenses (ncluding interest expense),GST paid,GST settlement, prepaid expenses, any payments for expenses incurred in previous periods (such as accrued wages)• Investing activities: Cash flows related to the purchase or sale of non-current assets

Question 5

RQ 16.2 // The Cash Flow StatementQ1. Define the following terms as they relate to the Cash Flow Statement, and provide an example of inflow and outflow:• Investing activities

Answer 5

• Investing activities: Cash flows related to the purchase or sales of non-current assets- Inflow: Cash received from the sale of a non-current asset- Outflow: Cash purchase of a non-current asset

Question 6

RQ 16.2 // The Cash Flow StatementQ1. Define the following terms as they relate to the Cash Flow Statement, and provide an example of inflow and outflow:• Financing activities

Answer 6

• Financing activities: Cash flows related to changes in the financial structure of the firm- Inflow: Receiving loans, capital contributions- Outflow: Repaying loan principal, cash drawings

Question 7

RQ 16.2 // The Cash Flow StatementQ2. Explain how the preparation of a Cash a Flow Statement can assist in decision-making

Answer 7

The Cash Flow Statement can assist decision-making about the firm’s cash activities by detailing the sources and uses of cash in a particular period.

Question 8

RQ 16.2 // The Cash Flow StatementQ2. Explain how the preparation of a Cash a Flow Statement can assist in planning for the future

Answer 8

The Cash Flow Statement can assist in planning for future cash activities by providing a basis for the next budgeted Cash Flow Statement, which will set targets for the future.

Question 9

RQ 16.2 // The Cash Flow StatementQ3. Explain why it may be more beneficial to prepare a Cash Flow Statement rather than just a Statement of Receipts and Payments

Answer 9

A Cash Flow Statement will identify Net Operating Cash Flows separately. Thus, if it is negative, the business will be unable to meet its other payments without contributions from the owner or external finance. This indicates that the business is unable to pay its own way, as it cannot rely on capital contributions and loans every period. If a business is unable to generate sufficient cash flow from its operating activities (day-to-day trading activities) to meet its financial obligations, then its future as a going concern is in serious doubt.

Question 10

RQ 16.3. // Cash VS. ProfitQ1. Identify the 3 main reasons why the change in a firm’s cash position may be different from it’s profit over the same period

Answer 10

• Some cash items do not affect profit.• Some profit items do not affect cash.• Some items affect both cash and profit, but by differing amounts.

Question 11

RQ 16.3. // Cash VS. ProfitQ2. Identify 2 cash inflows that are not revenues. Explain the effect these items will have on both bank and Net Profit.

Answer 11

• Cash capital contribution• Receipt of loan• GST refund These items are cash inflows that increase bank; however, they are not revenues, and so have no effect on Net Profit.

Question 12

RQ 16.3. // Cash VS. ProfitQ3. Identify 3 cash outflows that are not expenses. Explain the effect these items will have on both bank and Net Profit.

Answer 12

• Cash drawings• Loan principal repayment• Cash purchase of a non-current asset• GST settlement All these items are cash outflows that decrease bank; however, they are not expenses so have no effect on Net Profit.

Question 13

RQ 16.3. // Cash VS. ProfitQ4. Explain how a stock gain might explain how a firm can earn profit despite suffering a cash deficit.

Answer 13

Stock gain represents a gain of stock, not cash, and so is not reported in the Cash Flow Statement. It is a revenue that increases Net Profit but is not a cash outflow so has no effect on bank. This can lead the firm to earn a profit despite suffering a cash deficit.

Question 14

RQ 16.3. // Cash VS. ProfitQ5. Identify 3 items that will be reported as expenses in the Income Statement, but will not be reported in the Cash Flow Statement

Answer 14

• Depreciation• Stock loss• Any expense incurred but not yet paid

Question 15

RQ 16.3. // Cash VS. ProfitQ6. Explain the effect on both cash and profit if:• credit sales is greater than the receipts from debtors

Answer 15

The revenue (credit sales) increases profit more than the corresponding cash inflow (receipts from debtors) increases cash

Question 16

RQ 16.3. // Cash VS. ProfitQ6. Explain the effect on both cash and profit if:• cost of sales is greater than payments to creditors/cash purchases of stock p

Answer 16

The expense (cost of sales) decreases profit more than the corresponding cash outflow (payments to creditors /cash purchases of stock) decreases cash

Question 17

RQ 16.3. // Cash VS. ProfitQ6. Explain the effect on both cash and profit if:• expenses are prepaid for the next reporting period

Answer 17

The cash paid for the expense will decrease cash more than the corresponding ‘expense incurred’ decreases profit.