ADMS 1500 Class 4
Business Process flow: Role of cash
Inputs Q x $ Selling price x Q Our process: Direct costs $ x Q Indirect costs: allocated
Outputs Selling price x Q
Running out of cash is a serious threat to the continuation of the business.
Liquidity can be assessed through liquidity ratios such as the current ratio and the quick ratio.
Liquidity can also be monitored through the Statement of Cash Flows.
- Cash Flow: Protect against liquidity problems; need to have sufficient cash
What is the Cash Flow Statement? The cash flow statement is a classified summary of cash transactions
in the year showing how cash is received or spent in:
—operations related to revenue and expense
—purchase or sale of capital assets
—changes in debt and in shareholders’ equity (other than operations)
- Even if you have a lost you still have a positive cash flow – because profit is not the same thing
as cash flow
- Main reason: amortization – expense but it’s not cash
- Net income is not the same as cash flow – big difference is amortization
- Investing activities – negative cash flow, amortization – positive cash flow
How is the Cash Flow Statement Useful? The cash flow statement reveals the strategic choices the
company has made in the period just ended:
—does cash inflow exceed cash outflow?
—is the company expanding or contracting? If so, by
—is the company financing expansion by
borrowing or issuing shares? Is it repaying debt or redeeming shares? Is it paying dividends?
Cash from (used in) operations
Net income for the year
All other things being equal, net income increases cash
+ Depreciation & amortization, etc.
These are expenses deducted in calculating net income, but they do not require any cash flow.
+ Decrease in non-cash working capital
Decreasing inventory, receivables etc frees up cash flow
- Increase in non-cash working capital
Adding inventory & receivables or paying off creditors will