Normal Size Small Size show me how
Cash Flow Statement
UNIT 3 CH 12
|basic function of all accounting reports:
|Communicate financial info to the owner to assist decision making
|Why is cash so important?
|it is used to make payments that enable the business to function
|Important to report both cash and profit
|As they 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
|Function of a Statement of Receipts and Payments:
|Acc report that details cash received and paid during a RP, and the change in the firm’s bank b over that period. *incr or decr in cash.
|Layout of S of R and P:
|Cash receipts, total of RHS _ Less cash payments, total on RHS _ Surplus (deficit) _ add BB at start (date) _ BB at end (date)
|An excess of cash receipts over cash payments, leading to an incr in BB
|An excess of cash payments over cash receipts, leading to decr. In BB
|S of R and P is based on what?
|Cash journals thus, surplus (deficit) = CRJ less CPJ
|Why journals not source docs?
|If info is taken directly from source docs it wouldn’t be classified or summarised in any way. Instead, S of R and P is based on the cash journals
|state one reason why the owner might not be concerned about the firm’s Cash Position.
|The bank balance at end (31 December 2015) is positive.
|explain one reason why the owner should be concerned about the firm’s cash performance.
|There is an excess of cash payments over cash receipts for the Reporting Period (a cash deficit), which has led to a decrease in the bank balance. If net cash flows from O are neg. Insufficient funds ot meet other cash requirements.
|CFS Cash Flow Statement:
|An acc report that details all cash inflows and outflows from Operating, Investing and Financing activities, and the overall change in the firm’s cash balance.
|cash flows related to the firm’s day-to-day trading activities
|cash flows relating to the purchase or sale of non-current assets
|cash flows that are the result of changes in the firm’s financial structure.
|Why it may be more beneficial to prepare a Cash Flow Statement than just a Statement of Receipts and Payments.
|how the preparation of a CFS can assist in 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.
|Explain how the preparation of a CFS can 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.
|What subheading does interest go into?
|Operations - it is a payment of an expense
|Explain one reason why the owner might be concerned about the firm’s Net Cash Flows from Operations.
|It is negative, which indicates that the firm is not generating enough cash from its operating activities to fund its investing and financing activities + be unable to meet its other payments without cont. from owner or external finance.
|Discuss whether the huge cap contrib and loan receipt will have a positive or negative effect on its future cash activities.
|one way the owner might use this graph to aid decision-making
|Explain why COS is not reported in the CFS
|COS 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.
|State one reason why the total of the Debtors Control column of the Cash Receipts Journal may not represent cash received from debtors.
|The DC 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.
|Why is disc accounted for in CFS?
|It’s not cash so it technically isn’t in the CFS but it is used to calc receipts from DC as it is the “absence of a cash flow” the amount DC did not pay
|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)
|Explain why the total of the Creditors Control column of the CPJ is not reported in the CFS
|The Creditors Control column of the CPJ includes both the cash payments to creditors and the discount revenue, but only the cash paid should be reported in the CFS,
|Identify the four GST items that may be reported in the CFS
|GST received + GST refund + GST paid + GST settlement
|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.
|Identify two cash inflows that are not R. Explain the effect these items will have on both cash and Net Profit.
|capital contribution + loan received = cash inflows that increase cash, but are not R and so have no effect on NP.
|Identify three cash outflows that are not E. Explain the effect these items will have on both cash and Net Profit.
|Cash drawings + loan repayments + cash payments for NCA + GST paid incl GST settlement = cash outflows that decrease cash, but are not E so have no effect on NP
|Explain how a stock gain may be the reason why a firm can earn a profit, despite suffering a cash deficit.
|Stock gain is a R that increases NP, but is not a cash inflow (it represents a gain of stock) so has no effect on Bank.
|Identify three items that will be reported as expenses in the Income Statement, but will not be reported as cash outflows in the CFS
|Stock loss + bad debts + depr.
|Suggestions why owner may make cap contr:
|Keep bank balance out of OD, help fund purchase of NCA,
|GST received + GST refund are reported separately in CFS
|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)
|Classification of purchase of stock:
|Excluded as it doesn’t relate to NCA stock is a CA, so cash purchases is an Operating outflow (relates to day-to-day trading activities)
|Why GST paid on NCA is not I activity:
|All GST cash flows are reported as O activities as all GST paid to suppliers – whether for CA or NCA– is recorded in the GST column of the CPJ. (GST settlement/refund is a function of by day-to-day trading activities.)
|Explain how net net cash flows from I activities can lead to reduction in NP
|Increases NCA - depreciaiton E will increase - decreasing NP
|Why is GST paid greater than 10% of Net Cash flows from I activities?
|It includes GST on (some) Operating outflows.
|Possible sources of finance for purchase of NCA
|Existing cash reserves/overdraft + Net Cash Flows from Operations + Loan/Capital contribution