Workbook Chapter 16 Flashcards
Explain treatment of stock loss and loan repayment in regards to a cash flow statement.
Stock loss is a non-cash item as the expense represents the physical movement of stock out of the business. There is no cash flow involved in this transaction.
Loan repayment is the reduction of the principal of a loan. This constitutes a financing activity as it affects the financial structure of the business.
State one reason why wages paid might be less than wages expense.
Wages paid might be less than wages expense because the last pay date did not occur in the current reporting period but in the next reporting period. Therefore, wages were incurred and are now owing at the end of this reporting period.
State two reasons why GST paid does not equal 10% of Operating Out ows.
Loan interest does not attract GST and wages does not attract GST.
Explain the importance of net operating cash flows
Net Operating Cash Flows are very important in assessing the business’s liquidity as it indicates whether the business can pay its way and meet its financial obligations from just its operating activities without the need for capital contributions from the owner or external finance.
Explain treatment of credit purchase of equipment and prepayment of rent in regards to a cash flow statement.
Credit purchase of equipment is a non-cash item and was not included in this report as credit transactions do not involve a cash flow.
Prepayment of rent is a cash outflow regarding an operating activity as it a cash outflow relating to day to day trading activities.
Explain how Investing Cash Flows may have a negative effect on Net Profit.
Investing cash outflows indicate the purchases of non-current assets. The non-current asset’s cost will then have to be allocated as depreciation expense against the revenue they have helped earn to provide accurate matching. Increasing expenses has a negative effect on Net Profit.
Explain treatment of interest paid and drawings of stock
Interest paid is an operating cash outflow asit a cash outflow relating to day to day trading activities.
Drawings of stock represents a movement of stock out of the business and does not involve any cash flow. Therefore, it is a non-cash
transaction and not included.
Explain how Financing Cash Flows may have a positive effect on Net Profit.
Financing Cash Flows indicate the repayment of debt. As debt is reduced, the interest cost associated with it will decrease as well.
If expenses decrease then this will have a positive effect on Net Profit.
In terms of cash management, explain one reason why the owner should not be
overly concerned that Busy Bytes suffered a cash deficit for the year ended 30 June
2016.
There is a positive net operating cash flow that indicates that the business is quite capable of meeting its normal day-to-day payments as well as the investing and financing activities of the business. The business only went into overdraft this period due to the purchase of the shop fittings, which it did without seeking finance.
Referring to the information provided, explain two reasons that might explain why
Busy Bytes was able to earn a profit despite suffering a cash deficit in the year ended
30 June 2016.
Loan repayment is a cash payment but not an expense. Therefore, it decreases cash at bank but has no effect on Net Profit.
Purchase of shop fittings is a cash payment but not an expense. Therefore, it decreases cash at bank but has no effect on Net Profit.
Referring to the information provided, explain two reasons why Cracked Pepper
was able to generate a cash surplus despite suffering a Net Loss for May 2016.
Loan – NAB is a cash receipt but not a revenue. Therefore, it increases cash receipts but does not affect revenue and this improves cash at bank but has no effect on Net Profit.
GST refund is a cash receipt but not a revenue. Therefore, it increases cash receipts but does not affect revenue and this improves cash at bank but has no effect on Net Profit.
Explain why the owner should be concerned about the firm’s Operating Cash Flows
for May 2016.
There is a negative net operating cash flow that indicates that the business is not generating sufficient cash flows to meet its normal day- to-day payments. The business also is not providing cash for the investing and financing activities of the business. If the business is unable to meet its ongoing financial obligations its future as a going concern is in doubt.
Why shouldn’t Tim hire more staff
The business is unable to generate a positive net cash flow from its operating activities, indicating it cannot meet its current day-to-day obligations. The business only had an overall cash surplus due to the external borrowing of the business. The business cannot afford this additional expense at the moment.
Explain why Net Investing Cash Flows will usually be negative.
There is normally a negative net investing cash flow due to the fact that a business will normally purchase more non-current assets than it sells if it is growing. Even if it is replacing an old non-current asset, the cost of the new non-current asset will outweigh the cost of the old one that is being disposed of.
explain two reasons why Bella Rosa Tiles was
able to generate a cash surplus despite incurring a Net Loss in November 2016.
Loan – GE Finance is a cash receipt but not a revenue. Therefore, it increases cash receipts but does not affect revenue, and this improves cash at bank but has no effect on Net Profit.
Receipts from debtors was greater than credit sales for the period, and this improved cash at bank more so than Net Profit.
