Week 11 - Cash Flow

Question 1

What is the cash flow statement?

Answer 1

It is a report that includes information about the movement of cash (and cash equivalents) for the accounting period.
It reconciles opening and closing balances of cash.

Question 2

Why produce a cash flow statement?

Answer 2

It assesses the ability of the business to:

1. Pay its debts
2. Acquire Plant, property and equipment
3. Pay dividends
4. Borrow funds and service the repayment.

It also provides insight into:

1. How much cash was generated by operating activities.
2. Net cash flow regarding investing and financing.

Question 3

Define Cash equivalents?

Answer 3

Short-term highly liquid investments that are readily convertible to amounts of cash and subject to insignificant risk.

Question 4

Why would there be differences between Profit/Loss and cash flow?

Answer 4

P/L is determined using accounting accrual basis.
Some cash flow occurs with no impact to profit (i.e. purchasing equipment, borrowing money).
Profit affects expenses with no cash outflow (i.e. depreciation).

Question 5

What is the general rule around presenting the statement of cash flow

Answer 5

Cash flow should be separately classified by:

1. Operating activities (i.e. business related activity)
2. Investing activities (i.e. buy/sell long-term assests)
3. Financing activitites (i.e. changing size/composition of financial structure).

Question 6

Why use cash controls?

Answer 6

Cash is one of the most vulnerable assets and subject to theft.

Question 7

What are some internal controls used?

Answer 7

The separation of duties between people who have access to cash and those who account for its movements.

Question 8

What are some cash receipt controls

Answer 8

1. Cash registers and cash receipts
2. Independent person checks the cash receipts equal cash register
3. All cash deposited daily.
4. Customers encouraged to pay by EFT

Question 9

What are some cash payment controls

Answer 9

1. All payments properly authorised and linked to documentation.
2. Paid invoices stamped.
3. Cash payments not made directly from cash receipts.
4. Employees paid directly into bank accounts.
5. Regular bank reconcillations.

Question 10

What is bank reconciliation, how should it be performed and what adjustments are made?

Answer 10

Bank reconciliation is the comparison of the cash records with bank statements.

Should be performed regularly by someone without direct access to cash

a) Transactions recorded by bank before business and b) transactions recorded by the bank before business - all require adjustments.

Bank or business debits should be added to the bank reconciliation
Bank or business credits should be subtracted from the bank reconciliation.

Question 11

How do you reconcile bank statement transactions that should appear on the cash receipt journal (money in)

Answer 11

When an entry is on cash receipts journal, but not on bank statement - then ADD transactions.

When an entry is NOT on cash receipts journal, but ON the bank statement - then DEDUCT transaction.

Question 12

How do you reconcile bank statement transactions that should appear on the cash payments journal (money out)

Answer 12

When an entry is on the cash payments journal, But not on the bank statement - then DEDUCT the transaction.

When an entry is NOT on the cash payments journal, but ON the bank statement - then ADD the transaction.