Limitations of cash flow forecasting
Marketing, human resources, management, economic change
Cash Flow Forecast
Financial document that shows the expected movement of cash into and out of a business, per time period
Cash Inflows
Money coming into the business
Causes of cash flow problems
-Overtrading
-Over-borrowing
-Overstocking
-Poor credit control
-Unforeseen changes
Limitations of Cash Flow Forecasting
-Marketing: poor market research and incorrect sales figures
-Human resources: unproductive employees
-Operations Management: delays or machine failure
-Competitors: increase in competitors which decrease cash inflow
-Changing tastes and preferences: change in demand for products which decrease cash inflow
External Shocks: Wars, stock market crashes.
Methods to improve cash flow
Reduce cash outflow and increase cash inflow and reduce expenses
3 Types of Cash Flows
Operating, Finance, Investing
Operating Activities
Casual relationship to the income statement including interest income and expense
Investing Activities
Generally result from the purchase or sale of non-current assets and current "held to maturity" investments
Financing Activities
Non operating debt and equity, bank borrowing/payments. (not interest)
Indirect Method
Begins with net income, subtracts all expenses and contra assets and then adds all of the assets and liabilities that involved cash changing hands
summarizes a company's cash flows for a period of time and how that cash was used
statement of cash flows
measures the results of operations for a period of time
income statement
the accountant's best estimate of a company's economic performance for a period
net income
reports the period's transactions and events in terms of their impact on cash
statement of cash flows
statement of cash flows includes
information on operating, investing, and financing activities
a prediction of what the actual cash flow statement will look like in future years if the operating, investing, and financing plans are implemented
pro forma or 'projected'
short-term, highly liquid investments such as Treasury bills, commercial paper, and money market funds
cash equivalents
operating, investing, and financing
statement of cash flows 3 categories
operating activities
All transactions relating to a company's delivering or producing its goods for sale and providing its services are called
investing activities
All transactions relating to a company's delivering or producing its goods for sale and providing its services are called
financing activities
Obtaining resources from owners and providing them a return on their investment, and obtaining resources from creditors and repaying those borrowings
notes receivable
would NOT be considered cash or cash equivalent
purchase of treasury stock would be
reported as a financing activity on a statement of cash flows
amounts borrowed would NOT
be reported on a stmnt of cash flows as an investing activity
dividends paid would NOT
be reported on a stmnt of cash floes as an operating activity
cash receipts on the issuance of a long term debt
would be reported as a financing activity on a statement of cash flow
the indirect method is
more commonly used that the direct method
reporting the information contained in the last column of the adjustment worksheet
direct method
reporting the information contained in the last column of the adjustment worksheet
indirect method
The direct method of presenting a statement of cash flows
Shows the major classes of operating cash receipts and payments
6 step process step 1:
Compute the change in cash
6 step process step 2:
Convert the income statement from an accrual to a cash basis
6 step process step 3
Analyze the long-term asset accounts
6 step process step 4:
Analyze the long-term debt and stockholders' equity accounts
6 step process step 5:
Prepare the statement of cash flows
6 step process step 6:
Disclose any significant non-cash activities
In the absence of detailed cash account information, a company's cash inflows and outflows can be inferred through a careful analysis of each account contained in the balance sheet and the income statement
6 step process definition
When Mary Smith invests her personal money into her new company, what will happen to her company's Cash account?
The Cash account increases, and because of the double-entry system, the owner's equity account Mary Smith, Capital also increases.
When a company purchases inventory (merchandise purchased in order to be resold) what will happen to its Cash account?
The Cash account decreases, and because of the double-entry system, the asset account Inventory increases.
What happens to the company's Cash account if it borrows money from the bank by signing a note payable?
The Cash account increases, and because of the double-entry system, the liability account Notes Payable increases..
What happens to a company's Cash account if it declares and pays a dividend on its shares of stock?
When the company pays a dividend the Cash account decreases. Because of the double-entry system, the stockholders' equity account Retained Earnings also decreases.
What is the effect on its Cash account when a company pays some of its Accounts Payable?
The Cash account decreases, and because of the double-entry system, the liability account Accounts Payable is decreased.
What is the effect on its Cash account when a company prepays a 6-month insurance premium?
The Cash account decreases, and because of the double-entry system, the asset account Prepaid Insurance increases.
What is the effect on its Cash account when a company sells merchandise, but allows the customer to pay in 30 days?
There is no effect on the Cash account. The transaction does, however, result in a debit to the asset account Accounts Receivable and a credit to the income statement account Sales, which has the effect of increasing sales and net income on the income STM
What is the effect on its Cash account when a company receives payment from one of its customers 30 days after the sale was recorded?
On the day the cash is received, the Cash account increases, and because of the double-entry system, the asset account Accounts Receivable is decreased. (Be aware that this transaction has no effect on the income statement—there is no increase in Sales
If a company's Accounts Payable account decreased, what is the likely effect this will have on Cash?
If Accounts Payable decreased, we assume that the company paid some of its bills, therefore we assume that the Cash account also decreased.
If the asset account Prepaid Insurance increased, what is the likely effect on Cash?
If the asset account Prepaid Insurance increased, we assume that the company paid an insurance premium that covered more than the current month. Therefore, we assume that the Cash account decreased. Consider the general journal entry for this transaction
If the asset account Land increased, what's the likely effect on Cash?
If the asset account Land increased, we assume that the company paid cash to purchase the land, therefore, the Cash account decreased.
If the asset account Land decreased, what's the likely effect on Cash?
The Cash account increased because we assume that the company receives cash from the sale of any and all assets.
If the liability account Bonds Payable increases, what is the likely effect on Cash?
The Cash account increases because we assume the company receives cash when it issues bonds.
If the liability account Bonds Payable decreases, what is the likely effect on Cash?
The Cash account decreases because we assume that the company used cash or paid cash to repurchase/redeem/reduce its bonds that are outstanding.
change in assets (other than cash)
For a change in assets (other than cash), the change in the Cash account is in the opposite direction.
change in liabilities and owner's equity
For a change in liabilities and owner's equity, the change in the Cash account is in the same direction.
The statement of cash flows has four distinct sections:
1) Cash involving operating activities 2) Cash involving investing activities 3) Cash involving financing activities 4) Supplemental information/disclosures
Cash Provided From or Used By Operating Activities
This section of the cash flow statement reports the company's net income and then converts it from the accrual basis to the cash basis by using the changes in the balances of the current asset and current liability accounts, such as: Accounts Receivable
Cash Provided From or Used By Investing Activities
This section of the cash flow statement reports the cash flows causing the balances of long-term asset accounts to change. Examples include: Long-term Investments Land Buildings Equipment Furniture & Fixtures Vehicles
Cash Provided From or Used By Financing Activities
This section of the cash flow statement reports the cash flows causing the balances of the long-term liability accounts, the stockholders' equity accounts, and the short-term loans payable accounts to change.
