52 Questions
What is the main consequence if a company does not have enough cash available to pay its debts and expenses?
It will find it difficult to survive
What must the accountant manage properly to ensure the company's success?
The company's cash flow
What is the purpose of the Statement of Cash Flows?
To show the effect of the past year's business on the cash position
What is the term for using money to buy something with the intention of keeping it for a long time?
Investing
What is the term for the movement of cash in and out of the company?
Cash Flow
What should a company do if it has too much cash?
Use it to pay off its debt or expand its operations
What is the purpose of adding back interest expense in the Statement of Cash Flows?
To show interest paid as a significant cost that needs to be aware of by users of financial statements
What is the purpose of the reconciliation between Net Profit Before Taxation and Cash Generated from Operations?
To determine the cash generated from operations
What is the treatment of depreciation in the Statement of Cash Flows?
It is added back as it is not a cash payment
What is the purpose of the '5 FINGER EXERCISE'?
To calculate depreciation expense
What does the change in inventory represent in the Statement of Cash Flows?
A change in working capital
What is the purpose of showing the interest expense in the Statement of Cash Flows?
To show the actual amount paid
What does the increase in payables represent in the Statement of Cash Flows?
A source of cash
What is the purpose of adding back interest expense in the Statement of Cash Flows?
To show the actual amount paid as interest
What does the change in receivables represent in the Statement of Cash Flows?
A change in working capital
What is the purpose of the Statement of Cash Flows?
To show the cash generated from operations
What is the primary purpose of a Statement of Cash Flows?
To illustrate the flow of cash into and out of a company
What is the cash effect of selling a fixed asset?
An increase in cash balance
What is the cash effect of borrowing money from a financial institution?
An increase in cash balance
What is the purpose of the 'reconciliation' in the Statement of Cash Flows?
To reconcile net profit before taxation with cash generated from operations
Why is depreciation added back in the reconciliation?
Because it is not a cash payment
What is the '5 FINGER EXERCISE' used for?
Calculating depreciation
What is the cash effect of paying interest?
A decrease in cash balance
What is the cash effect of investing in a fixed asset?
A decrease in cash balance
What is the purpose of the cash effects of financing activities?
To show the changes in capital and non-current liabilities
What is the formula for cash generated from operations?
Operating profit before changes in working capital + Change in working capital
Match the following financial terms with their definitions:
Cash Flow = The movement of cash in and out of the company Liquidity = Having enough available cash to pay debts and expenses Investing = Using money to buy something with the intention of keeping it for a long time Operations = What you normally do to earn money
Match the following financial concepts with their purposes:
Statement of Cash Flows = To show the effect of the past year's business on the cash position Petty Cash Box = To generate actual physical money kept in the bank Short-term Investments = To earn interest on available cash Cash Float = To provide a small amount of cash for daily expenses
Match the following financial actions with their effects:
Paying off debt = To reduce liabilities Expanding the business = To increase revenue and growth Investing in fixed assets = To increase productive capacity Generating cash = To increase liquidity
Match the following financial reports with their contents:
Financial Statements = Report the success of the company to shareholders Statement of Cash Flows = Show the effect of the past year's business on the cash position Balance Sheet = Show the company's financial position at a particular point in time Income Statement = Show the company's revenues and expenses over a particular period
Match the following financial goals with their importance:
Profitability = To ensure the company's long-term success Liquidity = To pay debts and expenses on time Solvent = To ensure the company's stability Return on Investment = To provide a good return for shareholders
Match the following financial management tasks with their responsibilities:
Accountant = To manage the cash flow properly Investor = To provide funds for business operations Shareholder = To receive a good return on investment Manager = To oversee daily business operations
Match the following concepts with their descriptions in the Statement of Cash Flows:
Depreciation = A cash payment Interest expense = A non-cash item added back Increase in inventory = A decrease in cash Decrease in payables = A decrease in cash
Match the following concepts with their impact on cash:
Borrowing money from a financial institution = An increase in cash Investing in a fixed asset = A decrease in cash Selling a fixed asset = An increase in cash Paying interest = A decrease in cash
Match the following concepts with their purposes in the Statement of Cash Flows:
Reconciliation = To find the net profit before taxation 5 FINGER EXERCISE = To calculate the depreciation Interest expense = To show the actual amount paid Cash effects of changes in working capital = To find the operating profit before changes in working capital
Match the following concepts with their descriptions in the Statement of Comprehensive Income:
Interest expense = An important cost shown at the bottom Net profit before taxation = A figure needed to find the cash generated from operations Depreciation = A non-cash item subtracted from net profit Operating profit = A figure after adjustments for changes in working capital
Match the following concepts with their roles in the Statement of Cash Flows:
Interest expense = A cash outflow Depreciation = A non-cash item added back Inventory = A current asset Trade and other payables = A current liability
Match the following concepts with their relationships in the Statement of Cash Flows:
Increase in receivables = A decrease in cash Decrease in inventory = An increase in cash Increase in payables = An increase in cash Decrease in receivables = An increase in cash
Match the following concepts with their descriptions in the Statement of Cash Flows:
Cash generated from operations = The net profit before taxation plus adjustments Operating profit before changes in working capital = A figure before adjustments for changes in working capital Net profit before taxation = A figure before adjustments for interest expense and depreciation Changes in working capital = The difference between this year's and last year's figures
Match the following concepts with their roles in the Statement of Comprehensive Income:
Interest expense = A cost subtracted from net profit Depreciation = A non-cash item subtracted from net profit Net profit before taxation = A figure before adjustments for interest expense and depreciation Operating profit = A figure after adjustments for interest expense and depreciation
Match the following concepts with their purposes in the Statement of Cash Flows:
Reconciliation = To find the cash generated from operations 5 FINGER EXERCISE = To find the missing figure in the Tangible Assets Note Interest expense = To show the actual amount paid this year Cash effects of changes in working capital = To find the operating profit before changes in working capital
Match the following concepts with their descriptions in the Statement of Cash Flows:
Change in inventory = A cash flow related to the purchase or sale of stock Change in payables = A cash flow related to the payment of creditors Change in receivables = A cash flow related to the collection of debtors Depreciation = A non-cash item added back to net profit
Match the following cash flow components with their descriptions:
Operating activities = Earning cash from a job and paying living expenses Investing activities = Buying or selling fixed assets Financing activities = Borrowing money from a financial institution or using personal capital Cash effects = The change in cash balance during the year
Match the following cash flow items with their effects on cash:
Selling a fixed asset = Increase in cash (+) Borrowing money from a financial institution = Increase in cash (+) Buying a fixed asset = Decrease in cash (-) Paying interest = Decrease in cash (-)
Match the following with their purposes in the Statement of Cash Flows:
Reconciliation = To show the relationship between net profit and cash generated from operations 5 FINGER EXERCISE = To calculate a missing figure in the Tangible Assets Note Depreciation = To show the decrease in value of fixed assets Interest expense = To show the cost of borrowing money
Match the following with their effects on cash generated from operations:
Increase in inventory = Decrease in cash (-) Increase in receivables = Decrease in cash (-) Increase in payables = Increase in cash (+) Depreciation = No effect on cash
Match the following with their descriptions:
Net profit before taxation = The profit of a company before tax is deducted Cash generated from operations = The cash left after paying expenses and interest Operating profit = The profit from a company's operations before changes in working capital Cash effects of financing activities = The change in cash from borrowing or repaying loans
Match the following with their uses in the Statement of Cash Flows:
Appropriation account = To find net profit before taxation Statement of Comprehensive Income = To find depreciation and interest expense Tangible Assets Note = To calculate depreciation Cash effects of investing activities = To show the change in fixed assets
Match the following with their effects on the cash balance:
Positive cash effects of operating activities = Increase in cash balance Negative cash effects of financing activities = Decrease in cash balance Increase in cash from selling a fixed asset = Increase in cash balance Decrease in cash from paying interest = Decrease in cash balance
Match the following with their purposes in the Statement of Cash Flows:
Cash effects of operating activities = To show the cash generated from a company's operations Cash effects of investing activities = To show the change in a company's fixed assets Cash effects of financing activities = To show the change in a company's capital and loans Reconciliation = To show the relationship between net profit and cash generated from operations
Match the following with their descriptions:
Fixed assets = Assets used for a long time, such as a house or car Working capital = The cash needed for a company's daily operations Capital = The money used to finance a company's activities Non-current liabilities = Loans that need to be repaid in the long term
Match the following with their effects on the cash balance:
Repayment of a loan = Decrease in cash balance Increase in cash from a fixed deposit = Increase in cash balance Borrowing money from a financial institution = Increase in cash balance Paying tax = Decrease in cash balance
Study Notes
Financial Aims of a Public Company
- The main financial aims of a public company are to be profitable, solvent, and liquid, ensuring enough cash to pay debts and expenses on time. This is crucial for maintaining the trust of investors and stakeholders, as well as for the long-term survival of the company.
- Profitability ensures that the company generates revenue that exceeds its expenses, allowing it to reinvest in its operations, pay dividends to shareholders, and fund future growth initiatives.
- Solvency refers to the company's ability to meet its long-term financial obligations, such as paying off debts and loans. A solvent company is more likely to attract investors and maintain a strong credit rating.
- Liquidity, on the other hand, ensures that the company has sufficient cash and liquid assets to meet its short-term financial obligations, such as paying employees and suppliers.
Cash Flow Management
- Effective cash flow management is crucial to ensure the company's growth and provide a good return on investment for shareholders. This involves managing cash inflows and outflows to ensure that the company has sufficient liquidity to meet its financial obligations.
- The accountant must manage cash flow properly to ensure every cent is used efficiently, by prioritizing cash-generating activities, minimizing cash outflows, and maintaining a cash reserve to absorb unexpected expenses or revenue shortfalls.
- Good cash flow management also enables the company to take advantage of business opportunities, such as investing in new projects or expanding into new markets, which can lead to increased revenue and profitability.
Statement of Cash Flows
- A Statement of Cash Flows is a financial statement that shows the effect of the past year's business on the cash position, providing stakeholders with a clear understanding of the company's cash inflows and outflows.
- It is a legal requirement to include a Statement of Cash Flows in the financial statements, as it provides a transparent and comprehensive view of the company's cash management practices.
- The Statement of Cash Flows is divided into three main sections: operating, investing, and financing activities, which provide a detailed breakdown of the company's cash flows.
Cash Flow Generation
- Cash can be generated through operations (earning money), investing (buying/selling fixed assets), and financing (obtaining capital or loans), which are the three main sources of cash inflows.
- Cash generated from operations is the amount left over after paying expenses, interest, and taxes, and represents the company's ability to generate cash from its core business activities.
- Investing activities, such as buying or selling fixed assets, can also generate cash, while financing activities, such as obtaining capital or loans, can provide a temporary influx of cash.
Investing Activities
- Investing activities involve buying or selling fixed assets, such as property, cars, or computers, which can generate cash or require cash outflows.
- The cost of these assets represents cash paid out, while selling assets generates cash, which can be used to fund other business activities or invest in new opportunities.
- Investing activities can have a significant impact on the company's cash flow, as they often require significant cash outlays or generate substantial cash inflows.
Financing Activities
- Financing activities involve using personal money (capital) or borrowing from a bank (loans) to finance activities, which can provide a temporary influx of cash or a long-term source of funding.
- Repaying loans and raising capital are also part of financing activities, which can have a significant impact on the company's cash flow and financial health.
- Financing activities can be used to fund business expansion, renovate existing assets, or pay off debts, but they can also increase the company's debt burden and reduce its financial flexibility.
Personal Cash Flow Statement
Financial Aims of a Public Company
- The main financial aims of a public company are to be profitable, solvent, and liquid, ensuring enough cash to pay debts and expenses on time.
Cash Flow Management
- Effective cash flow management is crucial to ensure the company's growth and provide a good return on investment for shareholders.
- The accountant must manage cash flow properly to ensure every cent is used efficiently.
Statement of Cash Flows
- A Statement of Cash Flows is a financial statement that shows the effect of the past year's business on the cash position.
- It is a legal requirement to include a Statement of Cash Flows in the financial statements.
Cash Flow Generation
- Cash can be generated through operations (earning money), investing (buying/selling fixed assets), and financing (obtaining capital or loans).
- Cash generated from operations is the amount left over after paying expenses, interest, and taxes.
Investing Activities
- Investing activities involve buying or selling fixed assets, such as property, cars, or computers.
- The cost of these assets represents cash paid out, while selling assets generates cash.
Financing Activities
- Financing activities involve using personal money (capital) or borrowing from a bank (loans) to finance activities.
- Repaying loans and raising capital are also part of financing activities.
Personal Cash Flow Statement
- A personal cash flow statement can help understand how to prepare a company's cash flow statement.
- It involves generating cash from operations, investing, and financing activities.
Reconciliation of Net Profit Before Taxation and Cash Generated from Operations
- Net profit before taxation is adjusted for depreciation, interest expense, and changes in working capital to reconcile cash generated from operations.
Depreciation
- Depreciation is added back to net profit before taxation as it is a non-cash expense.
- Depreciation can be calculated using the 5-finger exercise or the tangible assets note.
Interest Expense
- Interest expense is added back to net profit before taxation as it is a cash expense.
- The amount of interest paid is shown in the Statement of Cash Flows.
Changes in Working Capital
- Changes in inventory, receivables, and payables affect cash flow.
- An increase in inventory means less cash, while a decrease in inventory means more cash.
Statement of Cash Flows
- The Statement of Cash Flows shows where cash came from, where it went, and whether it increased or decreased during the year.
This quiz examines the importance of liquidity in a company's financial management, including the need to have enough cash to pay debts and expenses, and the implications of having too much or too little cash.
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