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)
Cash surplus
An excess of cash receipts over cash payments, leading to an incr in BB
Cash deficit
An excess of cash payments over cash receipts
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.
Operating activities
cash flows related to the firm’s day-to-day trading activities
Investing activities
cash flows relating to the purchase or sale of non-current assets
Financing activities
cash flows that are the result of changes in the firm’s financial structure.
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.
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
