ACCOUNTING CASH FLOW STATEMENTS, Summaries of Business

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• 🌺 Chapter

Chapter 19

Cash Flow Statements

Definitions

Cash

Cash in hand, deposits in banks & other financial institutions less any bank overdraft

Cash Flow

The increase/decrease on the amount of cash held after a transaction has taken place

Net Debt

All borrowings - cash & liquid resources

Net Funds

Cash & liquid resources - borrowings

Borrowings

Debentures, loans + overdrafts

Liquid Resources

Cash & current asset investments Eg government securities

Purpose & Benefits & Importance

Main reasons why cash flow statements prepared: ➢ Show cash inflows/outflows during financial period ➢ Help predict future cash flows ➢ Aid financial planning ➢ Assess liquidity & solvency of bus. ➢ Show cash & profit not the same/equal ➢ Help provide clear picture of financial position of firm ➢ Info provided in CFS relevant to investment decisions of shareholder by: ○ Allowing bus. to assess liquidity ○ Allowing bus. to assess future prospects ○ Aid financial planning ○ Enabling owners ot make decisions about future & relationship with firm ○ Showing how firm - have overdraft but earn net profit and vise versa

Cash vs Profit

Occurs as some transactions affect cash but not profit ★ Example ○ Why?

Terms explained for cash and non-cash items

1. Non-Cash gain Increase profit but not cash Eg reduction in BDP Eg profit on sale of FA
2. Non-Cash expense Decreases profit but not cash Eg deprecation of FA Eg loss on sale of FA Eg increase in BDP
3. Cash gain Increases profit and cash Eg Cash sales of goods/services the bus. trades in
4. Cash expense Decreases both profit & cash Eg wages & salaries Eg other operating expenses