FINANCIAL ACCOUNTING: A CRITICAL APPROACH
CHAPTER 5: CASH FLOW, PROFITABILITY, AND THE CASH FLOW STATEMENT
How do win a monopoly game (exam question)?
Answer in one sentence. Buy as many properties as possible. Have a clear plan, and
know what you are going to do and don’t change the plan. Don’t buy railroad or other
set, don’t buy other color property. Cause you want to buy a house. You don’t want to
have a lot of assets with no money. You don’t want that. Bankrupt your opponent when
you need your pieces.
What are the best types of Business’s?
- The best types of Business’s are when customers have to constantly buy the product.
- Cash flow is a necessary concept to have a successful business, you need cash flow tha
is constant, repeating, etc. so you can pay bills etc.
What do company’s cut first when they are going into a recession?
- Cut down the amount of people working in the factory
- Overhead expenses
- Advertising expenses
What don’t you cut?
- Accounting; they do the cutting
Cash makes the world go round!
Cash is king!
It’s cash that pays the bills!
Without it, business quickly grinds to a halt
Cash and liquidity are important
You must have liquidity; liquidity is cash - the ability to pay short-term debts
Cash Cycle: Cash Lag:
Inventory conversion period (want this to be as short as possible)
Payable deferral period (where you purchase something and you are able to pay
it (want it to be as long as possible)
Receivables deferral period (good understanding in terms of analysis, of when
these start and finish- whether you want these shorter or longer)
Inventory self-financing period (good understanding in terms of analysis, of
when these start and finish- whether you want these shorter or longer)
Cash versus Accrual:
Cash accounting and accrual accounting tell a different story
Income statement reports economic flows, but not liquidity
What would you rather have cash or profit?
Cash is money you can put in your pocket, profit is nothing. Income statement doesn’t
state whether a business is a good company or not.
- On the final exam you will not have to develop/ put together an entire cash flow
- There will be a comprehensive question and you need to calculate the cash flow
- Statement of retained earnings
- Only thing you really need to make a decision whether to buy a business or not is
the cash flow statement (if you’re making a financial statement) (cash flow most
valuable information when it comes to financial statements)
- If the cash flow is nice, look in the other areas- balance sheet might have a huge
debt Cash Flow Statement:
Cash flows are grouped into 3 categories
- Cash flows from operations (Cash flows operation is the things you do on a day-
to-day basis, how you generate revenue)
- Cash flows from investing activities
- Cash flows from financing activities
Cash Flows - Operations:
- Amounts received from customers
- Tax refunds
- Interest collected
- Payments for inventory purchases
- Payments to other suppliers
- Payments to employees
- Taxes paid
- Interest paid
This is the way money goes out of the business, taxes, inventory, wages, etc.
Positive cash flow on operations, operate as long as you want- only problem;
inflations, and cost of living grows- business has to grow. $50,000 in 2013, vs.
$50,000 in 2040.
Cash Flows – Investing Activities: