ACW 1020

Key points for Week 5 topic

Measuring and reporting cash flows (SOCF)

To get the most from your online learning and resources, you are strongly encouraged to make your
own note. By actively identifying the critical points while you are studying this week’s content, you
are reaffirming your understanding of the topic. You will find your notes to be useful during your
revision for the tests or exam. You can use the following key points to start making your notes.

1. Importance of cash flows

 Different between income and cash
 Importance of cash
o Cash is said to be the “life blood” of a business
o Cash is the medium by which assets are acquired, expenses are met, debts
are paid and owners receive returns
 Coin and currency
 Currents, savings, and money market accounts
 Undeposited checks

 Classifications of cash flows

 The total amount of money being transferred into and out of a business, especially
as affecting liquidity (inflows and outflows)
 Importance of cash flows
o Cash flow indicates an ongoing ability to generate and use cash
o Point out the ability of the business to survive and to take advantage of
commercial opportunities as they rise
o Inability to find sufficient cash to settle external claims will result in financial
crisis
o Analysts, investors and shareholders watch cash flows carefully
 The format of statement of cash flows
 1. Operating activities
o Cash transactions concerned with buying and selling products and services
o Collection of customer accounts, Payment to suppliers for inventory, Payment of
insurance, Payment of wages
2. Investing activities
o Cash transactions concerned with acquiring and disposing of non-current assets
o Buying new non-current assets, Sales of property, plant and equipment,
Purchase/sale of another company
3. Financing activities
o Cash transaction concerned with the raising and repayment of funds in the form of
debt and equity
o Issuance/repurchase of shares, Issuance/retirement of bonds, Issuance/repayment
of bank note, Payment of dividends
2. Details of the Statement of cash flow

3. Cash accounting vs Accrual accounting

 Cash accounting
o Recognising transactions at the time when cash flows take place
o Applied by small businesses which normally run on cash transaction
 Accrual accounting
o Recognising revenue when they are earned
o Recognising expenses when they are incurred
o Applied in more sophisticated businesses where credit sales/transactions are
common
 Accrual accounting measures the business performance more accurately than cash
accounting
o As discussed in the video about the catering business, the company has an
erratic profit trend when revenue and expenses are recorded using cash
accounting. Many interested parties would not feel happy to see this trend
because it represents uncertainty.
o Under cash accounting, business performance is determined by how efficient
the company collects and controls cash, and neglect the efforts made to carry
out business transactions successfully. Investors would not be able to fully
understand the position and performance of a business if they were only
provided with the information on the total amount of cash in a company.
o On the contrary, accrual accounting underscores the efforts by the business to
earn revenue, as well as, identifies events that result in expenses. Therefore,
under accrual accounting, the performance is measured against the efforts
invested by the business to ensure sustainable operation. This information is
critical to investors in evaluating the potential of investing money in that
business.