ACC Ch 11

Statement of Receipts and Payments

Accounting report that details cash received and paid during a period, and the change in the firm’s bank balance over that period.

Cash Surplus

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

Cash Deficit

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

Cash Flow Statement

Accounting report that details all cash inflows and outflows from Operating, Investing and Financing activities, and the overall change in the firm’s cash balance.

• Start from financing up

Financing Activites

cash flows related to changes in the financial structure of the firm.

Inflows: Capital contribution, receipt of loan

Outflows: Drawings, loan repayment

Investing Activities

cash flows related to the purchase and sale of non-current assets

Inflows (Outflows): Sale (Purchase) of NCA

• Doesn’t include GST on NCA, all GST relate to day to day activites

Operating Activities

cash flows related to day- to-day trading activities

Everything else. 

Positive NCF from Operating Activities

Business is generating sufficient cash from day to day trading activities to meet its operating requirements and provide cash for investing and financing activities.

• Assesses liquidity

Negative NCF from Operating Activities

Cash on hand is being used and no funds generated for investing and financing activities. If continued, no cash to meet payments and an inability to operate (without cash from IA and FA)

NCF From Investing and Financing Activities

Negative investing CF may indicate positive financing CF as the purchase of NCA may be financed by loans/capital.

• Negative FA = taking too many loans

• Negative IA = too low bad, idle assets

Uses of CFS

• Assess Firm’s Performance Against Cash Targets

• Plan Future Cash Activities

• Calculate Financial Indicators to support Analysis and Interpretation

CFS: Assess Firm’s Performance Against Cash Targets

CFS details sources and uses of cash in a period 

• Areas of over and underperformance can be identified and corrected to improve cash (timeliness)

• Allows comparison of actual and budgeted cash inflows and outflows 

• Owner can assess if business is generating enough cash from Operating to fund Investing and Financing activities

CFS: Plan Future Cash Activities

Informs formulation of next cash targets

• CFS provides basis of next cash inflows and outflows (levels of sales/collections from AR, payments to AP, expenses)

CFS: Calculate Financial Indicators to support Analysis and Interpretation

Cash Flow Cover/CFC and other financial indicators can be calculated using CFS, allowing comparison of CFS elements with other items from reports. 

Strategies to Generate Cash

1. Generating cash inflows 

2. Minimising cash outflows

Generate Cash Inflows

• Increase sales revenue

• Implement strategies to manage AR

• Use loans and capital contributions to finance NCA purchase

Generate Cash Inflows: Increase sales revenue

Changing SP, advertising, improving customer service, changing locations

• High sales revenues can lead to higher cash inflows as they are generated from cash sales, receipts from AP.

Generate Cash Inflows: Implement strategies to manage AR

Discounts for early settlement, reminders. 

• Managing AR can generate higher cash inflows.

Generate Cash Inflows: Use Loans and Capital Contributions to Finance NCA Purchase

NCA can generate sales and therefore cash = loans and capital contributions allow business access to more funds

Minimise Cash Outflows

• Reduce expenses

• Utilise AP Credit terms

• Reduce cash drawings/loan repayments

• Defer purchase of NCA

• Organise bank overdraft

Minimise Cash Outflows: Reduce expenses

can lead to reduced cash payments and more cash on hand

• Though lower expenses = negative consequences for sales 

1. COS (poor inventory quality) 

2. Wages (fewer staff to serve customers, staff with less experience) 

3. Less advertising 

Minimise Cash Outflows: Utilise AP Credit Terms

Slower AP payments = cash retained longer and meet other payments 

• Though discount lost, credit terms aren’t exceeded

Minimise Cash Outflows: Reduce cash drawings/loan repayments

Leaves more cash to meet other payments. 

• Though drawings may be a wage for the owner

Minimise Cash Outflows: Defer purchase of NCA

Put off payments until cash position improves, so cash can be used to meet other payments

• Benefit must be weight against cost of not having the asset (loss of potential sales and cash)

Cash Flow Cover (CFC)

Liquidity indicator measuring number of times NCF from Operating Activities is able to cover average current liabilities. 

CFC = (NCF from Operating Activities/Average Current Liabilities)

• Unit = Times

• High CFC means cash generated from OA can cover current liabilities a large number of times, meaning business has good liquidity = meet short term debts as they fall due.

When NP > Cash

1. Not all revenues are cash inflows e.g., credit sales, discount revenue 

   • Increase revenue = increase net profit, but no effect on cash 

2. Not all cash outflows are expenses e.g., GST paid, cash purchase NCA, loan repayments 

   • Reduce cash position but have no decrease effect on profit 

When NP < Cash

1. Not all expenses are cash outflows e.g., discount expense

   • Reduce profit but no effect on cash position 

2. Not all cash inflows are revenues e.g., receipts from accounts receivable

   • Increase cash position but have no effect on net profit