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Lecture 5

BUSI 2150U Lecture Notes - Lecture 5: Net Income, Direct Method (Education), Working Capital

Course Code
BUSI 2150U
Michael Konopaski

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Chapter 5
Cash ow, Probability, and the Cash ow statement
The cycle of investing cash in resources, providing goods or services to customers using those resources,
and collecting cash from customers is called the cash cycle.
The cash cycle shows
how an entity manages
its cash.
The delay between
the expenditure of
cash and the receipt
of cash is called
the Cash Lag.
Conversion Period -
average length of time
between receiving
inventory from a supplier
and selling it to a
Payables Deferral
Period - average
number of days between
receipt of goods or
services from a supplier
to payment of the
Conversion Period -
average length of time
between delivery of
goods to a customer and
receipt of cash

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Chapter 5
Inventory Self- Financing Period - average number of days between the date inventory is
paid for by the entity and the date it's paid for by a customer
This is an important point—as sales increase, more inventory has to be carried to meet customer
demand, and more inventory means more cash is required to purchase it. As it does for inventory,
growth means more accounts receivable and more cash tied up.
The cash flow statement is necessary because the income statement doesn't give a complete picture of
an entity's resource flows. The income statement reports economic flows but doesn't distinguish liquidity.
This means that an income statement treats a cash expense the same as a non-cash expense (such as
depreciation) or a cash sale the same as a credit sale. The income statement also doesn't reflect
financing transactions or investment in long-term assets. The cash flow statement helps fill these gaps by
providing information about the changes in an entity's cash position.
i.e. Sale made for the month of December on credit will increase a company’s revenue for that month
since it will be added onto the accounts receivable section but in reality there is no positive effect on the
company’s cash as none of it is collected.
Three types of cash flow statements:
Cash from Operations (CFO): is the cash an entity generates or uses in its day-to-day business
activities. Money spent or received providing goods and services fits in this category.
Cash from investing activities: is the cash spent on buying capital assets and other long-term assets
and the cash received from selling those assets.
Cash from Financing Activities: is the cash raised from and paid to owners and lenders.
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