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Chapter 5

Chapter 5.doc

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Department
Accounting
Course
ACC 110
Professor
Marla Spergel
Semester
Fall

Description
Accounting chapter 5 Introduction – Cash is king - Cash is needed for the business to survive, without cash the company will not be able to meet its commitments to creditors such as the banks, its shareholders, etc The cash cycle - Cash must be spent before earning cash - The continuous series of invests of investing cash in resources, providing goods or services to customers using those resources and collecting cash is known as the cash cycle - The cash cycle is self sufficient where cash must be spent before earning revenue, and cash earned from selling the products to consumers provides the cash needed to purchase more inventory to sell for more cash. Furthermore, entities earn cash through equity investments and loans. These are needed when the company grows as more cash is needed to finance the growth of the firm, and when the value of inputs increase the company needs more cash to purchase and continue operations - The firm loses cash when they repay their bank loans, or pay out dividends to their investors or purchase capital assets to aid in their operations - The cash cycle shows that capital assets are needed to perform the operations of the business - The short term perception of the cash cycle ignores the need for capital assets and focuses on the investment of cash I operating inputs as in the short run these are needed to perform the remain operations of the business - The amount of time since cash was spent and the recieval of cash is classified as a term known as cash lag - The inventory conversion period is the average amount of time it takes since the purchase of inventory and the time it is sold to a consumer - The payables deferral period is the average amount of time between a good or service was purchased on credit and the day the payment was made back to the vendor - The recievables conversion period is the average amount of time between the day goods were sent and the recieval of cash - The inventory self financing period is the average number of days between date inventory is paid for and the date its sold to a consumer Length of the cash lag - Understanding how long it will take after providing a product to the buyer to receive cash helps us understane the ability of the firm to earn cash that it needs to operate, this varies as this relies on how the business operates and generates revenue - The more capable a firm is able of predicting what will take place in the future, the less difficulty the firm will have in terms of liquidation. For example, having knowledge that cats will be in demand in the future, stocking up in cats before then will ensure that we have a short amount of delay between the expenditure and recieval of cash - The inevitability of the future causes liquidation problems, or example think of this: We can never be certain of what may happen to the economy in the future, or a demand spike may occur or a supply spike may occur- - Businesses that are expanding are the most likely to incur liquidity problems where expansion and growth are good times for businesses, but making bad plans and having excessive optimisim about the future can cause a short
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