Unit 3 Acc Chapter 12 Review Questions

Question 1

RQ 12.1 // The Need to Report for Cash

Q1. Explain the basic function of all accounting reports.

Answer 1

Accounting reports have the function of communicating financial information to the owner to assist decision-making.

Question 2

RQ 12.1 // The Need to Report for Cash

Q2. Explain why it is important to report on both cash and profit.

Answer 2

Cash and profit are different measures of performance, and there may be many possible reasons why a firm that is earning a profit can still suffer from a lack of cash.

Question 3

RQ 12.2 // The Statement of Receipts & Payments

Q1. Explain the function of a Statement of Receipts and Payments.

Answer 3

A Statement of Receipts and Payments details cash received and paid during a Reporting Period, and the change in the firm’s bank balance over that period.

Question 4

RQ 12.2 // The Statement of Receipts & Payments

Q2. Explain why the information reported in the Statement of Receipts and Payments is taken from the cash journals rather than directly from the source documents.

Answer 4

If the information was taken directly from the source documents, it would not be classified or summarised in any way. Instead, the Statement of Receipts and Payments is based on the cash journals.

Question 5

RQ 12.2 // The Statement of Receipts & Payments

Q3. Define the following terms:

• cash surplus

Answer 5

cash surplus – an excess of cash receipts over cash payments, leading to an increase in the bank balance

Question 6

RQ 12.2 // The Statement of Receipts & Payments

Q3. Define the following terms:

• cash deficit

Answer 6

cash deficit – an excess of cash payments over cash receipts, leading to a decrease in the bank balance.

Question 7

RQ 12.2 // The Statement of Receipts & Payments

Q4. Referring to Figure 12.1, state one reason why the owner might not be concerned about the firm’s Cash Position.

Answer 7

The bank balance at end (31 December 2015) is positive.

Question 8

RQ 12.2 // The Statement of Receipts & Payments

Q5. Referring to Figure 12.1, explain one reason why the owner should be concerned about the firm’s cash performance.

Answer 8

There is an excess of cash payments over cash receipts for the Reporting Period (a cash deficit), which has led to a decrease in the bank balance.

Question 9

RQ 12.3 // The Cash Flow Statement

Q1. Define the following terms as they relate to the Cash Flow Statement:

• Operating activities

Answer 9

• Operating activities – cash flows related to the firm’s day-to-day trading activities

Question 10

RQ 12.3 // The Cash Flow Statement

Q1. Define the following terms as they relate to the Cash Flow Statement:

• Investing activities

Answer 10

• Investing activities – cash flows relating to the purchase or sale of non-current assets

Question 11

RQ 12.3 // The Cash Flow Statement

Q1. Define the following terms as they relate to the Cash Flow Statement:

• Financing activities

Answer 11

• Financing activities – cash flows that are the result of changes in the firm’s financial structure.

Question 12

RQ 12.3 // The Cash Flow Statement

Q2. Explain one reason why it may be more beneficial to prepare a Cash Flow Statement than just a Statement of Receipts and Payments.

Answer 12

While the Statement of Receipts and Payments classifies the cash transactions as receipts or payments, the Cash Flow Statement is more useful for decision-making as it classifies common sources of cash (into operating, investing and financing activities), and separately identifies their effect on the bank balance.

Question 13

RQ 12.3 // The Cash Flow Statement

Q3. Explain how the preparation of a Cash Flow Statement can assist in decision-making.

Answer 13

It can aid decision-making by detailing the sources and uses of cash in a particular period.

In particular, the owner would want to assess whether the business is generating enough cash from its operating activities to fund its investing and financing activities.

Question 14

RQ 12.3 // The Cash Flow Statement

Q4. Explain how the preparation of a Cash Flow Statement can assist in planning for the future.

Answer 14

By providing a basis for the next budget, the Cash Flow Statement will aid in the setting of targets for the future.

Question 15

RQ 12.3 // The Cash Flow Statement

Q5. Referring to Figure 12.2:

a. Explain one reason why the owner might be concerned about the firm’s Net Cash Flows from Operations.

Answer 15

Net Cash Flows from Operations is negative, which indicates that the firm is not generating enough cash from its operating activities to fund its investing and financing activities.

The firm will be unable to meet its other payments without contributions from the owner or external finance.

Question 16

RQ 12.3 // The Cash Flow Statement

Q5. Referring to Figure 12.2:

b. Discuss whether the firm’s financing activities will have a positive or negative effect on its future cash activities.

Answer 16

d The positive net cash flows from financing activities is mainly due to the Loan from Aust. Bank ($25 000) and a capital contribution ($5 000).

While these two have contributed to a smaller decrease in cash held by the firm, they are not regular receipts of a typical business and cannot be counted on to meet day-to-day payments.

Also, the level of cash drawings is of concern and may be considered too high given the negative net cash flows from operations and investing activities. If this trend continues, the firm may be facing liquidity problem in the future.

Question 17

RQ 12.3 // The Cash Flow Statement

Q6. Referring to Figure 12.3, explain one way the owner might use this graph to aid decision-making.

Answer 17

The understandability of the Cash Flow Statement is enhanced by the use of the graph.

It could be used by the owner to clearly see and understand the sources and uses of cash for the Reporting Period.

It is evident that both net cash flows from operations and investing activities are negative and this has led to an overall net decrease in the cash position. The owner can then use this information to make decisions to improve performance for the next period.

Question 18

RQ 12.4 // Using the Cash Journals

Q1. Explain why cost of sales is not reported in the Cash Flow Statement.

Answer 18

Cost of sales is not reported as it is not a cash flow, but rather a stock flow; it records the cost price of stock rather than the cash received from the sale.

Question 19

RQ 12.4 // Using the Cash Journals

Q2. State one reason why the total of the Debtors Control column of the Cash Receipts Journal may not represent cash received from debtors.

Answer 19

The Debtors Control column represents the total amount by which debtors will decrease and, in most cases, this figure will comprise some cash, but also some discount expense.

Question 20

RQ 12.4 // Using the Cash Journals

Q3. Show how receipts from debtors is calculated when discount expense has been recorded in the Cash Receipts Journal.

Answer 20

Receipts from debtors = Debtors Control (column total) – Discount Expense (column total)

Question 21

RQ 12.4 // Using the Cash Journals

Q4. Explain why the total of the Creditors Control column of the Cash Payments Journal is not reported in the Cash Flow Statement.

Answer 21

The Creditors Control column of the Cash Payments Journal includes both the cash payments to creditors and the discount revenue, but only the cash paid should be reported in the Cash Flow Statement.

Question 22

RQ 12.4 // Using the Cash Journals

Q5. Identify the four GST items that may be reported in the Cash Flow Statement.

Answer 22

• GST received
• GST refund
• GST paid
• GST settlement

Question 23

RQ 12.5 // Cash vs Profit

Q1. Identify the three main reasons why the change in a firm’s Cash Position may be different from its profit over the same period.

Answer 23

• 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 24

RQ 12.5 // Cash vs Profit

Q2. Identify two cash inflows that are not revenues. Explain the effect these items will have on both cash and Net Profit.

Answer 24

• capital contribution
• loan received

Both these items are cash inflows that increase cash, but are not revenues and so have no effect on Net Profit.

Question 25

RQ 12.5 // Cash vs Profit

Q3. Identify three cash outflows that are not expenses. Explain the effect these items will have on both cash and Net Profit.

Answer 25

• cash drawings
• loan repayments
• cash payments for non-current assets
• GST paid (including GST settlement)

All of these items are cash outflows that decrease cash, but are not expenses so have no effect on Net Profit.

Question 26

RQ 12.5 // Cash vs Profit

Q4. Explain how a stock gain may be the reason why a firm can earn a profit, despite suffering a cash deficit.

Answer 26

Stock gain is a revenue that increases Net Profit, but is not a cash inflow (it represents a gain of stock) so has no effect on Bank.

Question 27

RQ 12.5 // Cash vs Profit

Q5. Identify three items that will be reported as expenses in the Income Statement, but will not be reported as cash outflows in the Cash Flow Statement.

Answer 27

• stock loss
• bad debts
• depreciation

Question 28

RQ 12.5 // Cash vs Profit

Q6. Explain the effect on both cash and profit if:

• Credit sales is greater than Receipts from Debtors

Answer 28

• Credit sales is greater than Receipts from Debtors –

The revenue item increases Net Profit more than the corresponding cash inflow increases Bank.

Question 29

RQ 12.5 // Cash vs Profit

Q6. Explain the effect on both cash and profit if:

• Credit sales is less than Receipts from Debtors

Answer 29

• Credit sales is less than Receipts from Debtors –

The revenue item increases Net Profit less than the corresponding cash inflow increases Bank.

Question 30

RQ 12.5 // Cash vs Profit

Q6. Explain the effect on both cash and profit if:

• Cost of Sales is greater than Payments for Stock

Answer 30

• Cost of Sales is greater than Payments for Stock –

The expense item decreases Net Profit more than the corresponding cash outflow decreases Bank.

Question 31

RQ 12.5 // Cash vs Profit

Q6. Explain the effect on both cash and profit if:

• Cost of Sales is less than Payments for Stock

Answer 31

• Cost of Sales is less than Payments for Stock –

The expense item decreases Net Profit less than the corresponding cash outflow decreases Bank.

Question 32

RQ 12.5 // Cash vs Profit

Q6. Explain the effect on both cash and profit if:

• Expenses are accrued at the end of the Reporting Period

Answer 32

-Expenses are accrued at the end of the Reporting Period –

The expense item decreases Net Profit more than the corresponding cash outflow decreases Bank.

Question 33

RQ 12.5 // Cash vs Profit

Q6. Explain the effect on both cash and profit if:

• Expenses are prepaid for the next Reporting Period

Answer 33

• Expenses are prepaid for the next Reporting Period –

The expense item decreases Net Profit less than the corresponding cash outflow decreases Bank.