accounting unit 2 - theory questions (cash flow) 🎀

what is a cash flow statement?

a period statement that shows the cash inflows of a business entity during a period, and the cash outflows from the business during that period (i.e: monthly, quarterly, or annually). It tracks how much cash is coming in and going out, helping to assess the company liquidity - that is, its ability to meet short-term obligations.

what is the purpose of a cash flow statement?

The main purpose of a Cash Flow statement is to highlight the operating, financing and investing activities of the entity during a period. It is important because it tracks the actual movement of cash and shows real money coming in and out of the business. It helps to prevent cash shortages by preparing the business with enough cash to pay their bills when they are due. It helps the owner make more informed decisions about choices such as when to invest or cut costs

Conventional statements do not clearly indicate the business’s ability to:

Generate a positive cash flow, pay debts as they fall due, fund future expansion projects, obtain funds for owners, lenders, etc, pay drawings and dividends.

What should cash flow statements show?

cash flows in and out of the entity, changes in financial position, capital contribution or loans

what does cash mean?

cash on hand or cash equivalents, which include cash at bank, highly liquid investments and borrowings (such as bank overdrafts) which are payable on demand.

what are cash flows?

movements of cash in or out of the business, resulting from transactions with an external party

what is an external party?

a party outside of the business

what are examples of transactions that are not considered a movement of cash?

selling goods (ie: inventories) on credit to accounts receivables, purchasing goods (ie: inventories) on credit from accounts payable, purchasing/selling non-current assets (ie: motor vehicle) on credit, exchanging one non-current asset for another

what are examples of transactions that do not involve an external party?

cash moved from one account to another (ie: cash moved from CAB to mortgage), depreciation, amortisation, increases in provision for doubtful debts, balance day adjustments for accruals and prepayments

what are operating activities?

related to the transactions that make up profit (revenue). Examples for inflow include cash sales, collection of accounts receivables, interest received and rent revenue. Examples of outflows include payments to suppliers, interest paid, etc

what are investing activities?

related to the long-term asset accounts. Examples of inflows include sales of non-current assets. Examples of outflows include purchase of a non-current asset

what are financing activities?

related to the non-current liability and owner equity accounts. examples of inflows include capital contributions and loans. Examples of outflows include drawings and payment of borrowings.

what are the internal sources of finance?

operations (revenue earned), short-term loans from owners, capital from owners, retained earnings

what are the external sources (outflows) of finance?

bank overdraft, accounts payable, short-term loans, mortgages. debentures, leases