Inventory Reporting: Cash Flow & Balance Sheet Summary

Cash Flow Statement: Purpose and Structure

• Purpose: communicates cash movements by operating, investing and financing activities; shows change in cash over the period.
• Focus: only cash transactions; ignore credit/non-cash items (e.g., depreciation, accruals).
• Core outputs: Cash Flows from Operating Activities, Investing Activities, Financing Activities.
• Inventory treatment in Cash Flow: report cash purchases (outflow) and cash sales (inflow) under Operating Activities; Cost of Sales is not a cash flow.
• Net cash flow calculation:
  $\text{Net Increase in Cash} = \text{Net Cash Flows}<em>{\text{Operating}} + \text{Net Cash Flows}</em>{\text{Investing}} + \text{Net Cash Flows}_{\text{Financing}}$
  $= 14{,}360 + 0 + (-500) = 13{,}860$

Cash Flow Statement Classification Headings

• Operating Activities: day-to-day trading; inflows include cash sales, receipts from Accounts Receivable, GST receipts, GST refunds, other revenue; outflows include cash purchases of inventory, payments to Accounts Payable, GST paid, advertising, wages, materials, interest, etc.
• Investing Activities: inflows from sale of non-current assets; outflows from purchase of non-current assets.
• Financing Activities: inflows from owner contributions and loans; outflows from drawings and loan repayments.
• Presentation note: cash flows under each heading are subtotalled; brackets often used to denote outflows.

The Balance Sheet: Purpose and Basic Formula

• Purpose: reports assets, liabilities and owner’s equity at a specific date (as at a date).
• Accuracy date example: as at 31 October 2025.
• Accounting equation: $\text{Assets} = \text{Liabilities} + \text{Owner’s Equity}$
• Presentation: left side lists assets; right side lists liabilities and owner’s equity; totals must balance.

Balance Sheet: Format and Classification

• Assets
  • Current Assets: resources expected to be sold, consumed or converted to cash within 12 months.
  • Non-current Assets: resources expected to be used for more than 12 months.
• Liabilities
  • Current Liabilities: obligations expected to be settled within 12 months.
  • Non-current Liabilities: obligations not due within 12 months.
• Owner’s Equity
  • Capital, Add: Capital Contribution, Add: Net Profit, Less: Drawings (or Net Loss instead of Net Profit).
• Balance: Total Assets = Total Liabilities + Owner’s Equity.

Balance Sheet: Reporting Inventory

• Inventory reporting approach:
  • Refer to Inventory Cards
  • Use the BALANCE column
  • Use the total sub-column (Qty × Cost Price)
  • Rely on the physical inventory count for the ending balance

Balance Sheet: Inventory Balance (concept)

• Ending Inventory is determined by reconciling Beginning Inventory, Purchases, returns, Cost of Goods Sold, and any adjustments from the inventory records and physical count.
• General formula:
  $\text{Ending Inventory} = \text{Beginning Inventory} + \text{Purchases} - \text{Cost of Goods Sold} \pm \text{Inventory Adjustments}$
• Reconcile to the balance per inventory cards and the physical count.

Owner’s Equity Section of the Balance Sheet

• Format example (per the slides):
  • Capital - Owner’s name
  • Add: Capital Contribution
  • Add: Net Profit
  • Less: Drawings
  • Subtotal (Owner’s Equity)
• If a Net Loss is reported instead of Net Profit, adjust accordingly (i.e., use Net Loss in place of Net Profit).

Margin Metrics (quick reference)

• Gross Profit Margin:
  $\text{GP Margin} = \frac{\text{Gross Profit}}{\text{Sales}} \times 100\%$
• Net Profit Margin:
  $\text{NP Margin} = \frac{\text{Net Profit}}{\text{Sales}} \times 100\%$
• Benchmark context: industry averages provided (e.g., 25% GP margin and 5% NP margin or 40% GP and 12% NP); use for quick comparison of performance.

Inventory and Exercises (context for exams)

• Exercises involve: preparing a Cash Flow Statement and Income Statement for trading firms; reporting GST settlements and buying expenses; preparing the Owner’s Equity section of the Balance Sheet; calculating and commenting on margin metrics.
• Remember: for cash flow and inventory reporting, emphasize cash transactions, the three CF classifications, and inventory reporting from cards and counts.