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Chapter 5

BUSI 2150U Chapter Notes - Chapter 5: Cash Flow Statement, Cash Cash, Cash Flow

Course Code
BUSI 2150U
Michael Konopaski

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Cash Flow, Protability and the Cash Flow Statement
Chapter 5 – Cash Flow, Protability and the Cash Flow Statement
If an entity is short of cash, suppliers may stop supplying and employees may stop
It's cash, not income or revenue, that pays the bills
The Cash Cycle
An entity usually has to spend money before collecting cash from customers
almost always a lag between the expenditure of cash and the receipt of cash
Cash cycle is the cycle by which an entity begins with cash, invests in resources,
provides goods or services to customers using those resources, and then collects cash
from customers
The cash cycle shows all investment, including capital assets, needed to operate a
Cash lag is the delay between the expenditure of cash and the receipt of cash
Inventory conversion period is the average length of time between receiving inventory
from a supplier and selling it to a customer
Payables deferral period is the average number of days between receipt of goods or
services from a supplier to payment of the supplier
Receivables conversion period is the average length of time between delivery of goods
to a customer and receipt of cash
Inventory self-financing period is the average number of days between the date
inventory is paid for by the entity and the date it's paid for by a customer
If the future were perfectly predictable, few entities would face liquidity problems
Growing businesses often face liquidity problems
Expansion and growth are positive times for businesses, but poor planning and excessive
optimism can lead to cash shortages
It's management's responsibility to manage an entity's cash and liquidity
An external stakeholder must monitor the entity to ensure it has adequate cash and
liquidity to survive and operate successfully
The Cash Flow Statement: Overview
Cash flow statement is the financial statement that shows how cash was obtained and
used during a period and classifies cash flows as operating, investing, or financing
Also known as the statement of cash flows or the statement of changes in financial

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Cash Flow, Protability and the Cash Flow Statement
Cash flow statement is necessary because the income statement doesn't give a complete
picture of an entity's resource flows
Income statement reports economic flows but doesn't distinguish liquidity
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
Income statement also doesn't reflect financing transactions or investment in long-term
Cash flow statement helps fill these gaps by providing information about the changes in
an entity's cash position
Short-term liquid investments are easily converted to a known amount of cash, with little
risk that the amount of cash to be received will change
Bank overdraft occurs when an entity removes more money from its bank account than
there is in the bank account, effectively creating an amount owing to the bank, treated as
Cash flow statement groups cash flows into three categories
Cash from operations (CFO) is the cash an entity generates from or uses in its
regular business activities
Tax refunds, receivables are cash inflows
Payments to suppliers, employees, taxes paid, are cash outflows
Cash from investing activities is the cash an entity spends buying capital and
other long-term assets and receives from selling those assets
Sale of capital assets, collection of principal loan, proceeds from IPO,
interest & tax receivable (also included in CFO) are cash inflows
Cash spent on PPE, intangible assets, loans to others, purchase of
securities are cash outflows
Cash from financing activities is the cash an entity raises and pays to equity
investors and lenders
Proceeds from sale of entity’s shares, issuance of debt, bank loans are cash
Repayment of debt principal, bank loans, repurchase of entity’s shares,
dividends paid, interest paid are cash outflows
Understanding the Cash Flow: Specific Activities
Financing and Investing Activities
Financing Activities
Financing activities is cash raised from and paid to owners and lenders
These are cash transactions that affect the financing accounts on the balance sheet
Growing businesses may need cash from external sources if they haven't saved enough to fund
the growth
Cash inflows from financing activities arise from obtaining bank loans, arranging mortgages,
issuing bonds and other long-term debt, and issuing preferred and common shares
Financing cash outflows arise from repaying debt and repurchasing shares
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