Cash flow statement

If the business has a negative net cash flow from investing, should the business be concerned?

Net Cash Flows from Investing Activities is negative, which will mean pressure on a reduction in the firm's bank balance. However, negative Investing cash flows may be expected if the business is purchasing new non-current assets, and positive Financing cash flows may be due to loans or a capital contribution to finance these assets. Further, more or better non-current assets may generate more sales, and more cash

Where does interest go in the Cash Flow Statement?

OPERATING- it is a payment for an expense !do not be tempted to classify it as financing!

Show how receipts from debtors is calculated when discount expense has been recorded in the Cash Receipts Journal

Receipts from debtors = Debtors Control (column total) - Discount Expense (column total)

What is the function of a Statement of Receipts and Payments?

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

Why is GST paid on "purchase of fittings" not reported as an investing activity?

all GST cash flows are reported as Operating activities as all GST paid to suppliers - whether for current or non-current assets - is recorded in the GST column of the Cash Payments Journal. (GST settlement/refund is a function of by day-to-day trading activities.)

Define cash deficit

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

Define cash surplus

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

How does the preparation of Cash Flow Statement assist in planning for the future?

by providing a basis for the next budget, the Cash Flow Statement will aid in the setting of targets for the future

Define "Investing activities"

cash flows relating to the purchase or sale of non current assets

Define "Financing activities"

cash flows that are the result of changes in the firm's financial structure, so only cash transactions that change loans and owner's equity (like receiving or paying the principal loan of a loan, or cash contributions or drawings by the owner)

Examples of financing outflows

cash paid: - cash drawings- not stock or assets ONLY CASH - repaying of the principal of the loan- NOT INTEREST OF THE LOAN (goes in operating)

Treatment of "purchase of stock" in the Cash Flow Statement

excluded as it doesn't relate to non-current assets; stock is a current asset, so cash purchases is an Operating outflow (relates to day-to-day trading activities)

How may positive Net Cash Flows from Financing activities lead to a reduction in Net Profit?

if it involves the receipt of a Loan, Interest expense may increase, leading to a reduction in Net Profit

Define "Operating activities"

refers to all cash flows related to the firm's day to day trading activities

Effect on cash and profit if cost of sales is less than payments for stock

the expense item decreases Net Profit less than the corresponding cash outflow decreases Bank

3 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 and cash but by different amounts

Examples of outflows in the Operating Cash Flows

- Payments to creditors - Cash purchases of stock - GST Paid - Interest Paid - GST Settlement - Utilities - Advertising

Examples of Cash Flows that go in the "Investing activities"

- Purchase of NCA eg. vehicle for cash - Proceeds from sale of NCA eg. Equipment

Why is capital not included in the Income Statement?

it is expressly excluded from the definition of revenue as it not earned as a result of the activities of the business (but rather the owner)

Where does the interest that is incurred for keeping a loan go?

operating activity- it is an expense that is incurred to keep the loan, not to finance the business

What are the 4 GST items that may be reported in the Cash Flow Statement?

- GST received - GST refund - GST paid - GST settlement

Examples of inflows in the Operating Cash Flows

- Receipts from debtors - Cash Sales - GST Received - Interest Received (eg. Interest revenue) - GST Refund

2 cash inflows that are NOT revenues + effect on cash and profit

- capital contribution - loan received both are cash inflows that increase the bank balance but are not revenues, thus do not affect profit

4 cash outflows that are NOT expenses + effect on cash and profit

- cash drawings - loan repayments - cash payments for non current assets - GST paid and GST settlement all are cash outflows that decrease cash, but are not expenses so do not affect Net Profit

How can a business earn profit even if it suffered negative net cash flows from operations?

- if credit sales are greater than receipts from debtors: credit Sales is revenue and so increases Net Profit by more than Receipts from Debtors increases Net Cash Flows from Operations - prepaid insurance/ payments to creditors is greater than cost of sales: prepaid insurance is a cash outflow, which decreases Net Cash Flows from Operations more than Insurance expense decreases Net Profit

Why is preparing a Cash Flow Statement better than a Statement of Receipts and Payments?

- it aids decision-making by classifying sources and uses of funds, allowing the owner to identify whether Net Cash Flows from Operations is sufficient to cover other cash requirements - it aids decision-making by allowing the firm to assess its performance in meeting its cash targets - it assists in planning for future cash activities by providing a basis for cash targets for the future (in the next Budgeted Cash Flow Statement)

Why is GST received and GST refund reported separately in the Cash Flow Statement?

- received from different entities (customers v. ATO) - recorded in different columns in the Cash Receipts Journal (GST v. Sundries) - may relate to different Reporting Periods (current v. previous)

3 items that will be reported as an expense in the Income Statement, but will not be reported as cash outflows in the Cash Flow Statement

- stock loss - bad debts - depreciation

What is the basic function of all accounting reports?

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

Why is 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

Examples of financing inflows

cash received from: - cash contribution by owner - receipt of loan (taking out a loan)

Why is cost of sales is not reported in the Cash Flow Statement?

cost of sales is not reported as it is not a cash flow, but rather a stock flow; it records the cost price of stock rather than the cash received from the sale

What is the importance of net cash flows from operations to the success of a trading business?

if Net Cash Flows from Operations are negative, the firm will be unable to meet its other cash requirements without using other sources of finance, such as loans (which must be repaid) or capital (which is limited to the funds of the owner)

Why is the info reported in the Statement of Receipts and Payments is taken from the cash journals rather than directly from the source documents?

if it was taken from the source documents directly, then it would be classified or summarised in any way. Instead he Statement of Receipts and Payments is based on the cash journals

Why would the owner be concerned about the firm's Net Cash Flows?

if the there is a net decrease in cash position and the business is relying too much on the financing activities (which is because of the owner contributing cash to keep the business in a positive net cash position)

How does the operation of a Cash Flow Statement assist in decision making?

it can aid decision-making by detailing the sources and uses of cash in a particular 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

How may negative Cash Flows from Investing Activities lead to a reduction in Net Profit

it increases non-current assets, so Depreciation expense will increase, leading to a reduction in Net Profit

Is discount expense included in the Cash Flow Statement?

it is excluded from the Cash Flow Statement altogether as it is a non-cash expense. (It involves a decrease to Debtors Control rather than Bank.)

"Net cash from Operating activities indicates whether the business has made a profit or loss" Is this statement true?

no, only cash inflows and outflows related to day to day trading activities are included in the calculation of the Net Cash from Operating Activities figure, whereas the business profit is the result of subtracting expenses incurred from revenues earned. Cash flows from operating activities and net profit measure quite different information. Example: Debtor receipts may be greater than Credit Sales, expenses incurred are greater than those paid, payments to Creditors is less than Cost of Sales

How can a stock gain be a reason that a firm can earn profit, despite suffering a cash deficit?

stock gain is a revenue that increases Net Profit, but is not a cash inflow (it represents a gain of stock) so has no effect on Bank

If the owner thinks a Cash Flow Statement is better than an Income Statement, explain why this is wrong

the Cash Flow Statement and Income Statement are both important because they report on different aspects of business performance. The Cash Flow Statement reports on cash inflows and outflows, which may differ from the revenues earned and expenses incurred reported in the Income Statement

Why is the total of the Creditors column of the Cash Payments Journal is not reported in the Cash Flow Statement?

the Creditors Control column of the Cash Payments Journal includes both the cash payments to creditors and the discount revenue, but only the cash paid should be reported in the Cash Flow Statement

Why is the total of the debtors control column of the Cash Receipts Journal may not represent cash received from debtors?

the Debtors Control column represents the total amount by which debtors will decrease and, in most cases, this figure will comprise some cash, but also some discount expense

Effect on cash and profit if expenses are prepaid for the next reporting period

the expense item decreases Net Profit less than the corresponding cash outflow decreases Bank

Effect on cash and profit if cost of sales is greater than payments for stock

the expense item decreases Net Profit more than the corresponding cash outflow decreases Bank

Effect on cash and profit if expenses are accrued at the end of the reporting period

the expense item decreases Net Profit more than the corresponding cash outflow decreases Bank

Effect on cash and profit if credit sales is less than receipts from debtors

the revenue item increases Net Profit less than the corresponding cash inflow increases Bank

Effect on cash and profit if credit sales is greater than receipts from debtors

the revenue item increases Net Profit more than the corresponding cash inflow increases Bank

Why would the owner use a graph to interpret a Cash Flow Statement?

the understandability of the Cash Flow Statement is enhanced by the use of the graph. It could be used by the owner to clearly see and understand the sources and uses of cash for the Reporting Period

Why is it more beneficial to prepare a Cash Flow Statement that 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

If the business has a negative net cash flow from operating, should the business be concerned?

yes, Net Cash Flows from Operations is negative so the firm cannot meet its Investing and Financing cash requirements without additional loans (which must be repaid) or capital (which is limited to the funds of the owner)

A business can earn a profit but suffer a decrease in cash due to:

→ High cash payments were made that are not expenses- drawings, loan repayments → High revenues were earned that are not cash receipts- stock gain → Revenue item higher than the cash received- credit sales > receipts from debtors → Expense item lower than the cash paid - cost of sales < payments for stock, other expense incurred < paid

A business can suffer a net loss, but generate an increase in cash:

→ High cash receipts were received that were not revenues- capital contribution, loan received → High expenses were incurred that are not cash payments- stock loss, bad debts, depreciation → Revenue item lower than the cash received- credit sales < receipts from debtors → Expense item higher than the cash paid- cost of sales > payments for stock, other expense incurred > paid