CASH AND CASH FLOW

In accounting, there are two basis:
Cash basis Accrual basis

Statement showing how cash was generated versus how it was spent for the time period (usually a year) just ended

Two types: Direct and Indirect method

DIRECT METHOD

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List actual receipts and payments the company receives or issues regarding to its operating activities during the accounting period.

Simpler, but requires companies to actually keep track of receipts and payments in cash.

Some companies lump up credit sales and cash sales, or credit purchase and cash purchase, thus unable to use this method

INDIRECT METHOD

Convert from Net Income of a company into various cash inflows and outflows from operating activities.
Useful for companies not bookkeeping cash receipts and payments of their operating activitie

Include:

Cash effects of delivering or producing goods for sale.

Cash effects of providing services.

Cash effects of transactions and other events that enter into the determination of income

Securities that are not cash equivalents.
Productive assets that are expected to benefit the firm for long periods of time

Include:

Borrowing from creditors.

Repaying principals.

Obtaining resources from owners.

Providing owners with a return on the investment

The difference between a firm’s current assets and current liabilities

Working capital cycle: The period of time between:
_ The time cash is paid for raw materials
_The time cash is received for goods sold

In order to prepare a cash budget, a number of estimated figures must be determined:
Sales and purchases
Wages and overheads
Exceptional receipts or payments

One method is to look at the past and determine the pattern

This is called Time series analysis

A trend of a series of figures in a time series is the way in which the figures are moving in general despite various fluctuations caused by seasonality

Short-term fluctuations

Due to different circumstances affecting results at different times of the year, days of the week etc.

Longer-term fluctuations

May take several years to complete

Examples:
Sales of fashion items Technological items
_ Economy cycles

Companies can have cash surpluses and cash deficit

Cash deficit requires corrective actions.

Cash surpluses can be invested for more profits