Chap 11 Reporting for cash

1 Define the following terms:cash surplus

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

1 Define the following terms as they relate to the Cash Flow Statement and identify one cash inflow and one cash outflow under each classification:· Investing activities

- cash flows relating to the purchase or sale of non-current assets Inflow: Cash sale of a non-current asset Outflow: Cash purchase of a non-current asset

1 Define the following terms as they relate to the Cash Flow Statement and identify one cash inflow and one cash outflow under each classification:· Financing activities

- cash flows that are the result of changes in the firm's financial structure. Inflow: Receipt of a loan, cash capital contribution Outflow: Repayment of loan principal, cash drawings

Explain the function of a Statement of Receipts and Payments

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

1 Explain the basic function of all accounting reports.

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

1 Explain what is indicated by an increase in the Cash Flow Cover.

An increase in Cash Flow Cover means that the cash generated by Operating activities can cover current liabilities more times, meaning the business has improved liquidity and should be able to meet its short-term debts as they fall due.

1 Identify which type of graph might be useful to represent: · Net Cash Flows in a particular year:

Bar graph

1 State what is measured by the Cash Flow Cover (CFC).

Cash Flow Cover (CFC) assesses liquidity by comparing the net Cash Flows from Operations against the current liabilities that the firm will have to meet. Specifically, it measures the number of times average current liabilities can be met using the net Cash Flows from Operations.

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

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. It is important that the owner is provided with different information on both items as without information on both cash and profit, the owner will not be able to manage both effectively

1 Explain why reports for cash are prepared from the Bank account in the General Ledger rather than the source documents.

If the information was taken directly from the source documents, it would would apply to individual transactions only, and would not be sorted in any way. Information in the Bank account has been sorted into cash receipts (debit side) and cash payments (credit side) and identifies the source or use of that cash.

1 Explain how information about timing can influence an assessment of cash flows.

Information about timing can provide indicate the purpose of a particular cash flow, explaining why that cash flow occurred and therefore providing reasons for the firm's cash performance.

Explain how an Inventory gain may be the reason why a firm can earn a profit, despite suffering a decrease in cash.

Inventory gain is a revenue that increases profit but is not a cash inflow (it represents a gain of inventory) so has no effect on cash.

Explain how a Cash Flow Statement can be used by a business to assess its cash performance.

It allows the owner to assess the firm's performance against its cash targets by detailing the sources and uses of cash in a particular period so that areas of over and under performance can be identified and corrective action taken to improve cash. Comparisons of actual and budgeted (expected) cash inflows and cash outflows will highlight where performance was better or worse than expected. Strategies can then be implemented to generate more cash inflows and/or control cash outflows more effectively in the next 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.

Explain the possible relationship between Net Cash Flows from Investing activities and Net Cash Flows from Financing activities.

Negative Investing cash flows could mean Financing cash flows are positive as the purchase of non-current assets is financed by loans and/or capital.

1 Describe how cash outflows are usually identified in a Cash Flow Statement.

Outflows are usually identified by the use of brackets eg. ($4 000) or by use of a heading.

1 Explain why it is important for a business to generate positive Net Cash Flows from Operations.

Positive net Cash Flows from Operations is important because it means the business is generating sufficient cash from its day-to-day trading activities to meet its operating requirements, and also provide cash for Investing and Financing activities. By contrast, negative net Cash Flows from Operations not only uses any available cash on hand, but also means funds are not being generated for Investing and Financing activities. Continued in future periods, this would mean no cash to meet payments and, ultimately, an inability to operate (without cash from Investing and Financing activities).

1 Explain how the information reported in the Statement of Receipts and Payments differs from the data recorded in the Bank account in the General Ledger.

Rather than list every individual cash transaction as recorded in the Bank account, receipts and payments are summarised according to their source or use before they are reported in the Statement of Receipts and Payments.

1 Explain why a GST settlement is reported separately from GST paid.

The GST settlement amount is reported separately because, unlike GST paid, it is paid to the ATO to settle the GST debt from the previous period.

1 Explain why a business must record and report its cash sales in an ethical manner.

The information presented in the reports is used by a variety of users to make decisions, so the business has an ethical responsibility to report its cash sales in a manner which allows those users to rely on the reports as a Relevant and Faithful representation of the firm's transactions

1 State three benchmarks that could be used to assess the adequacy of the Cash Flow Cover.

There is no set benchmark at which the Cash Flow Cover would be considered satisfactory. however, it can be compared against the Cash Flow Cover from previous periods, budgeted performance and competitors' performance (industry averages) to determine whether it has improved or worsened.

Explain how a Cash Flow Statement can be used by a business to plan for future cash activities

This is done by informing the formulation of the next set of cash targets (budgets). By providing a basis for the next set of budgeted cash inflows and cash outflows, the Cash Flow Statement will aid in setting cash targets for the future. this may include levels of cash sales or collections from Accounts Receivable, payments to Accounts Payable or for expenses, or the financing and purchasing of non-current assets using loans and capital contributions

Referring to one Qualitative characteristic, explain the purpose of using graphical representations to communicate information about cash flows.

Understandability requires financial information to be presented in a way that is comprehensible to (can be understood by) users, meaning it should be presented clearly and concisely. even for users who have a high level of financial literacy, one way of ensuring this occurs is to utilise graphical representations of the information in the reports

1 Explain how GST received and GST paid are determined.

Where the cross-reference of a transaction includes GST Clearing, it indicates GST was involved and the GST amount is calculated by dividing the transaction amount by 11. these individual amounts for GST received or GST paid can then be added together to determine the total GST cash flows.

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

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.

1 Identify which type of graph might be useful to represent: · Net Cash Flows over time:

line (or bar) graph

Explain the effect on both cash and profit if: Credit sales is less than Receipts from Accounts Receivable:

the revenue item (Credit sales) increases profit less than the corresponding cash inflow (Receipts from Accounts Receivable) increases cash, so profit will be lower than the change in cash.

1 Explain the effect on both cash and profit if:· Credit sales is greater than Receipts from Accounts Receivable:

the revenue item (Credit sales) increases profit more than the corresponding cash inflow (Receipts from Accounts Receivable) increases cash, so profit will be higher than the change in cash.

Explain the effect on both cash and profit if:Cost of Sales is less than cash paid for inventory

· - the expense item (Cost of sales) decreases profit less than the corresponding cash outflow (Cash purchases of inventory / Payments to Accounts Payable) decreases cash, so profit will be higher than the change in cash.

1 Identify the three main reasons why the change in a firm's cash position may be different from its profit over the same period.

· 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.

1 Identify two cash inflows that are not revenues. Explain the effect these items will have on both cash and profit.

· capital contribution · loan received Both these items are cash inflows that increase cash but are not revenues and so have no effect on profit.

1 Identify three cash outflows that are not expenses. Explain the effect these items will have on both cash and profit.

· 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 profit.

1 Define the following terms as they relate to the Cash Flow Statement and identify one cash inflow and one cash outflow under each classification: Operating activities

· cash flows related to the firm's day-to-day trading activities Inflow: Cash sales, Receipts from Accounts Receivable, GST received Outflow: Cash purchase of inventory, Payments to Accounts Payable, GST paid, expenses paid, GST settlement

1 List five strategies that might be used to generate more cash inflows.

· increase sales revenue by:changing selling prices, advertising, changing the inventory mix, improving customer service or even changing location · implement strategies to manage Accounts Receivable via credit checks, discounts for early settlement and reminders use loans and capital contributions to finance the purchase of non-current assets

1 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.

· inventory loss · inventory write down -depreciation

1 List five strategies that might be used to minimise cash outflows.

· reduce expenses · utilise the credit terms offered by suppliers · reduce cash drawings or loan repayments · defer purchases of non-current assets

Explain the effect on both cash and profit if:Cost of Sales is greater than cash paid for inventory

· the expense item (Cost of sales) decreases profit more than the corresponding cash outflow (Cash purchases of inventory / Payments to Accounts Payable) decreases cash, so profit will be lower than the change in cash.

List three pieces of non-financial information that might inform the management of cash

· the number of expected sales in the next period · the credit rating of a particular Account Receivable · the length and strength of a relationship with a particular Account Payable the age of existing assets

Define the following terms: cash deficit

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