Week 4 - Lecture 4 Flashcards
What is the primary purpose of Statement of Cash Flows?
the statement of cash flows reports the** cash inflows and outflows **during a **specific period, **providing **insights into an entity’s liquidity, solvency and overall financial health **
Cash Flow Categories
what is the operating activities category?
includes cash recieved from customers, cash paid to suppliers, wages, taxes and interest payments. Reflects core business operations
Cash Flow Categories
what is the investing activities category?
involves cash flows from buying or selling non-current assets, like equipment, land or buildings
Cash Flow Categories
what is the financing activities category?
covers **cash flows from borrowing money, issuing shares, repaying loans, and paying dividends **
What is the managers role as a stakeholder?
helps identify future cash shortages or surpluses, informs decisions on investment and expansion
what is the lenders/creditors role as a stakeholder?
assesses whether the **business can meet its debt obligations **
what is the shareholders/investors role as a stakeholder?
provides insights on cash management and potential risks to investments
What is the overall goal of all stakeholders?
ensures businesses can **meet obligations, reinvest, and distribute profits while maintaining solvency **
what is the flow of cash within the business cycle?
- **purchase inventory: **initial outflow
- **payment of expenses (wages, rent): **outflows before generating revenue
- **sale of Goods/services: **recieves cash, often on credit terms
- cash flow timing: a business typically experiences cash outflows before inflows, making cash flow management critical
what are the components of a Cash Flow Statement?
Operating Activities: Cash generated or used from core trading, including:
-* inflows: cash from customers
- ouflows:* payments to suppliers, employees, interest, taxes
Investing Activities: Cash flows from acquiring and selling non-current assets
- outflows: purchase of new equipment, land buildings
- *inflows: *sale of these assets
Financing Activities: Cash flows related to the funding of operations
-* inflows: *borrowing, issuing shares
- outflows: repayment of debt, dividend payments
Cash Accounting vs Accrual Accounting
- cash accounting: only records cash recieved or paid, not earned or incurred
- accrual accounting: records revenues when earned and expenses when incurred, regardless of cash movement
Difference between Profit and Cash Flow
a business can be profitable but still face cash shortages due to factors like:
- credit sales: proft recorded but no cash recieved
- unearned revenue: cash received before earning the revenue
what is the direct method for calculating operating cash flows?
Gross receipts and payments
What is the Indirect Method for calculating operating cash flows?
adjust profit for non-cash items
define Free Cash Flows (FCF)
indicates available cash for debt repayment, expansion or dividends
- formula: FCF = Cash from operating activities - capital expenditures (eg. purchasing equipment)
define Cash Adequacy Ratio
measures the **sufficiency of operating cash to cover capital expenditures and dividends **
- formula: cash adequacy ratio = cash from operating activities / (capital expenditures + dividends)
what should a healthy business show?
should show both profit and consistent positive cash flow from operating activities
when is negative cash flow acceptable?
may be acceptable during growth phases sue to investments in assets but should be monitored for sustainability
what are the challenges in cash management?
A company must **balance cash inflows and outflows to avoid insolvency. **Key concerns include:
- sufficient cash for obligations (eg. accounts payable, wages)
- managing cash surpluses: consider reinvestments, paying off debts, or distributing dividends
strategies to manage cash shortages
- adjust collection policies on accounts receivable
-** limit the credit offered** to customers - encourage **early payments **with discounts
- consider using **accounts payable to manage cash outflows **
- explore financing options, like loans or issuing shares
strategies of excess cash
- **invest **in new opportunities
- pay off existing **debt **
