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Unit 3 AOS 2 (Reporting for profit (Net profit and the AAs and QCs…
Unit 3 AOS 2
Reporting for profit
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Income statement
An accounting report that details the revenues earned and expenses incurred during the current period, helps to understand how the profit or loss was generated
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Strategies
For earning profit - change selling prices (increase or decrease), market strategically and effectively, implement strategies to improve ITO, pay suppliers within discount terms
To control expenses - find a cheaper supplier, control inventory related expenses, improve staff productivity or reducing their working hours, find cheaper prices for non-essential expenses
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Reporting for cash
Cash flow statement
Reports on cash inflows and outflows, separately identifying cash flows relating to operating, investing and financing activities
Upholds understandability and relevance as information is more useful for decision making if it classified into common sources and uses, separately identifying their effect on bank
Operating activities - cash flows related to the firm's day to day trading activities, expected to be positive to ensure that the business has sufficient cash from its day to day trading activities to meet its operating requirement
Investing activities - cash flows related to the purchase and sale of non-current assets, expected to be negative a business will usually spend more on purchasing NCAs than is from selling them
Financing activities - cash flows that are the result of changes in the firms financial structure, can be positive or negative depending on if the business is expanding or operating as normal
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Strategies
Generate cash inflows - increase sales revenue, implement strategies to manage accounts receivable, use loans and capital contributions to finance the purchase of non-current assets
Reduce cash outflows - reduce non-essential expenses, utilise credit terms offered by suppliers, reduce drawings or loan repayments, defer the purchase of non-current assets
Cash flow cover
A liquidity indicator that measures the number of times net cash flows from operations is able to cover the average current liabilities
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