WK7 Flashcards
A business cannot survive without
cash
Cash is not the same as
profit
Profit
income earned and expenses incurred
Statement of cash flows
cash coming in and out/received and paid
The cash flow statement only records what kind of transactions?
Cash
Principal income-producing activities
Operating activities
Purchase or disposal of non-current assets
Investing activities
Activities that result in changes in the size and composition of equity and borrowings
Financing activities
Cash going in
Source of cash
Cash going out
Use of cash
How are negative numbers or subtractions recorded in the statement of cash flows?
With brackets
Net cash USED in operating activities are recorded as
Negative numbers
Net cash FROM operating activities are recorded in
Positive numbers
The tool you use in interpreting financial statements
Ratio analysis
What question does the profitability ratio ask?
How successfully is the business trading?
Examples of profitability ratios
Gross profit margin
Operating profit margin
Net profit margin (after taxation)
Net profit margin (before taxation)
ROCE (Return on capital employed)
Examples of liquidity ratios
Current ratio and acid test (quick) ratio
What question does the liquidity ratio ask?
How easy is it for the business to pay for and manage its ability to meet its short-term financial obligations?
The higher the current ratio, the more _______________ …?
Liquid an entity appears to be
When a company’s liquidity is positive, the better they pay off their _________________ expenses
daily/operating
Measures the effectiveness of an entity’s use of resources
Efficiency ratio
The shorter it takes for businesses to turn their inventory into cash (inventory turnover period), receive its trade receivables (settlement period for trade receivables), pay off its trade payables (settlement period for trade payables), the _______________
better
What question do efficiency ratios pose?
How effectively are the short-term assets and liabilities of the business being managed?
Retained earnings is part of ___________.
capital
Investments are part of the _____________________ assets.
non-current
Interest received is part of _________________.
operating expenses
Debentures are part of ____________ liabilities.
non-current
Interest paid is calculated after _________________ have been calculated, contributing to profit before tax.
operating expenses
A healthy company has a positive ______________________________ and negative _________________.
cash inflow from operating activities; investing activities
What does positive cash inflow from operating activities and negative investing activities mean, respectively?
Positive cash inflow: trading position is good (buying and selling)
Negative investing activities: business is expanding, positive investing activities would mean you’re selling assets
Is a negative/positive financing activities good?
It depends on the company’s situation.
Operating activities mostly cover
Day to day expenses
Investing activities mostly cover
anything related to non-current assets (buying/selling)
Financing activities mostly cover
debt & equity (ncl + equity/how the company borrows money to fund it)
