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23 Cards in this Set
- Front
- Back
What type of accounting does the cash flow statement use?
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Cash accounting
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If the accrual is created by a cash transaction, then what must happen?
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It must be reversed by a non-cash transaction
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Purpose of a cash flow statement?
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- to identify the sources and uses of cash during the year
- to highlight the material operating, financing and investing activities of the entity during a financial period |
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Why is cash flow data important?
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As it is highly reliable and less subject to estimation/manipulation than accrual accounting
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Cash flows
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inflows and outflows of cash and cash equivalents
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Cash Equivalents
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Short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value
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What does each transaction involve?
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- A movement of cash
- An external entity/party (i.e. someone to pay cash to/to receive cash from) |
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________ and ___________ are used in day-to-day cash management.
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Cash and highly liquid investments
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What are examples of cash and highly liquid investments?
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Notes, coins, demand deposits
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What else does cash include?
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Borrowings (at call) used int he day-to-day cash management
e.g. bank overdraft |
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Are AR and AP included?
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NO
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Why is cash important?
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Because organisations and people will not normally accept any other form of settlement of claim against the business
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Why do businesses fail?
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As a result of an inability to find sufficient cash to settle their responsibilities
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Bankruptcy
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When Equity (A-L) becomes negative because liabilities exceed assets and the entity is not in a position to use assets to pay off liabilities
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Legal bankruptcy
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Bankruptcy from an accounting point of view
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Default on liabilities
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When you do not have enough cash to pay a current liability even though you have lots of assets
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You can be in ___________ without actually being _____________
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default, bankrupt
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Cash is....
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the pre-eminent business asset and therefore the one that analysts and others watch carefully in assessing survivability of the business
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Balance Sheet
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- static report made at a given point in time
- based on balances in assets, liabilities and OE - normally based on accrual transactions |
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Income Statement
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- measures the financial performance over a period of time (normally a year)
- related to revenues earned less expenses incurred |
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Cash Flow Statement (differences)
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- identifies all cash receipts and cash payments for the period
- based on cash, not accrual, transactions - incorporates all account types --> Has operations generated more cash than was spent |
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What does the cash flow statement help users to do?
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- Assess the ability of the business to generate cash flows
- Assess the financial performance and financial position of the entity - Assess where the entity has spent cash and received cash from - Ass the entity's ability to generate further cash flow |
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What does the cash flow statement explain?
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The changes in the cash balances between two balance dates (i.e. it explains changes in cash between start and end of financial period)
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