Cash surplus an excess of cash receipts over cash payments, leading to an increase in the bank balance

Cash deficit an excess of cash payments over cash receipts, leading to a decrease in the bank balance
Cash Flow Statement an accounting report that details all cash inflows from Operating, Investing and Financing
activities, and the overall changes in the firms cash balance
Operating activities
Operating activities refers to all cash flows related to the firms day-to-day trading activities. Operating inflows will
include cash sales, receipts from debtors, GST received, and any other cash revenues. Operating outflows will include
all payments related to expenses (including interest), Payments to creditors, GST paid, any prepaid expenses, and
any payments for expenses incurred in previous periods (such as Accrued wages).
Investing activities
Investing activities are cash flows relating to the purchase or sale of non-current assets. In practice this will mean
there are only two possible investing items: cash received from the sale of a non-current asset (Investing inflow) and
cash purchase of a non-current asset (Investing outflow)
Financing activities
Financing activities are cash flows that are the result of changes in the firms financial structure. In essence, this will
mean only cash transactions that change loans and owners equity, such as receiving or repaying the principal of a
loan, or cash contributions or drawings by the owner.
Uses of the Cash Flow Statement
To aid decision-making about the firms cash activities by detailing the sources and uses of cash in a particular
period.
To identify whether the business is generating enough cash from its Operating activities to fund its Investing and
Financing activities.
To assess whether the business is meeting its cash targets by comparing the Cash Flow Statement against budgeted
(or expected) cash flows.
To assist in planning for future cash activities by providing a basis for the next budgeted Cash Flow Statement, which
will set targets for the future.
Cash items that do not affect profit
Cash receipts that are not revenues Cash payments that are not expenses
Capital contribution Cash drawings
Loan received Loan repayments
Cash payments for non-current assets

Profit items that do not affect cash
Revenues that are not cash receipts Expenses that are not cash payments
Stock gain Stock loss
Bad debts
Depreciation

Items that affect both cash and profit
many items affect both cash and profit. Where the item affects both, but by differing amounts, the firms profit will
not be the same as its cash performance.
Credit sales and receipts from debtors
Selling goods on credit will increase profit immediately, but may not involve a cash flow
until much later. Conversely, when the cash is received from the debtor it will increase
bank, but it is not revenue. And if a discount is involved, the cash received from the
debtor will be less than the revenue earned when the sale was made. Thus the different
amounts reported as Credit sales and Receipts from debtors could explain why cash and
profit are not the same. If Credit sales is greater than Receipts from debtors, the benefit in
terms of profit will be greater than the benefit in cash. If Credit sales is less than Receipts
from debtors, the firm may very well have less profit than cash.

Cost of sales and payments to creditors
The way stock is paid for can also mean that cash and profit are not the same. Cost of
sales represents the value of stock sold, but this may not be the same as the amount that
has been paid for that stock (as Cash purchases or Payments to creditors). Remember,
Cost of sales represents a stock flow, not a cash flow. If Cost of sales is greater than
Payments to creditors, it will reduce profit more than it reduces bank. If Cost of sales is
less than Payments to creditors, it will mean a greater reduction in bank than in profit.

Expenses: amount paid versus amount incurred
Due to balance day adjustments, the amount paid for expenses is frequently different from
the amount incurred. When expenses are paid in advance for the next Reporting period
(such as Prepaid rent or Prepaid insurance), the amount paid will be greater than the
amount incurred, meaning that cash decreases more than profit. On the other hand, if
expenses are accrued at the end of the Reporting period, the amount incurred will be
greater than the amount paid, meaning profit decreases more than cash.
Revenue/expense item Cash inflow/outflow
Credit sales Receipts from debtors
Cost of sales Payments to creditors/Cash purchases
Other expense incurred Other expense paid (may be titled Accrued
and/or Prepaid)
A firm may earn a Net profit but suffer a decrease in Cash due to:
Reason Examples
Cash payments that decrease bank but are not Cash drawings
expenses and so do not affect profit Loan repayments
Cash payments for NCAs

Revenues that increase profit but are not cash Stock gain
receipts and so do not affect bank

Revenue items that increase profit more than Credit sales greater than receipts from debtors
the corresponding cash receipt increases bank

Expense items that decrease profit less than Cost of sales less than payments to creditors
the corresponding cash payment decreases bank Other expense incurred less than paid

A firm may suffer a Net loss but generate an increase in cash due to:

Reason Examples
Cash receipts that increase bank but are not Capital contribution
revenues and so do not affect profit Loan received

Expenses that decrease profit but are not cash Stock loss
payments and so do not affect bank Bad debts
Depreciation

Revenue items that increase profit less than the Credit sales less than receipts from debtors
corresponding cash receipt increases bank

Expense items that decrease profit more than Cost of sales greater than payments to
the corresponding cash payment decreases bank creditors ..Other expense incurred greater than paid

explain your treatment of Drawings.
Classified as a Financing outflow as it is a cash flow related to a change in the firms
financial structure (i.e. decrease Owners equity)
Suggest one reason why the owner made the capital contribution of $10 000.
To keep the bank balance out of overdraft
To help fund the purchase of the display cabinets
Explain one benefit of preparing a Cash Flow Statement rather than a Statement of Receipts and Payments.
It classifies sources and uses of funds, allowing the owner to identify whether cash
flows from Operating activities is sufficient to cover other cash requirements.
Explain one reason why the owner should be concerned about the firms cash performance for the quarter ended
30 September 2010.
Net Operating Cash Flows is negative, meaning the business is generating insufficient
funds from its Operating activities to meet its other cash requirements.
(If not for the capital contribution, the bank overdraft would have fallen, and would
currently be in overdraft.)
explain your treatment of Accrued interest paid.
Classified as an Operating outflow as it is a cash flow related to the firms
day-to-day trading activities
Explain the importance of Net Operating Cash Flows to the success of a trading business.
If Net Operating Cash Flows are negative, the firm will be unable to meet its other
cash requirements without using alternative sources of finance like loans (which
must be repaid) or capital (which is limited to the funds of the owner).
explain your treatment of Discount expense.
It is excluded as it is a non-cash expense (involving a decrease to Debtors Control
rather than Bank).
Explain why the GST received and GST refund must be reported separately in the Cash Flow Statement
Received from different entities (customers v. ATO)
Recorded in different columns in the Cash Receipts Journal (GST v. Sundries)
Relate to different Reporting periods (current v. previous)
Explain why the GST paid on purchase of equipment is not reported as an Investing Activity.
All GST cash flows are reported as Operating activities as the GST settlement or
refund is a function of / determined by day-to-day trading activities.
Explain how a negative Net Investing Cash Flows may lead to a reduction in Net profit.
It increases non-current assets, so Depreciation expense will increase, leading to a
reduction in Net profit.
Explain why a capital contribution is not reported in the Profit and Loss Statement.
It is expressly excluded from the definition of revenue (as it not earned as a result of
the activities of the business, but rather the owner).
Explain how a positive Net Financing Cash Flows may lead to a reduction in Net profit.
If it involves the receipt of a loan, interest expenses may increase, leading to a
reduction in Net profit.
Identify two examples from the Cash Flow Statement that explain how firm was able to record an increase in cash
despite suffering a Net loss. Explain your response.
Example 1 Capital contribution / Payments to creditors was greater than Cost of sales
Example 2 Receipts from debtors was greater than Credit sales
Explanation Capital contribution is a cash inflow which increased Net Cash Flows but it is not a revenue
and so had no effect on the Net loss.
Payments to creditors decreased Net Cash Flows by less than Cost of sales (expense)
decreased Net profit (or increased the loss).
Explain how the Cash Flow Statement can aid decision-making.
The Cash Flow Statement reports cash inflows and outflows, thus allowing the owner
to identify problem areas so corrective action can be taken.
(This is particularly the case when it is compared against the Budgeted Cash Flow
Statement.)
Receipts from debtors and discount (which decreases debtors) is greater than Credit
sales plus GST (which increases debtors). Therefore the debtors control would be lower
The Cash Flow Statement and Profit and Loss Statement are both important because
they report on different aspects of business performance: the Cash Flow Statement
reports on cash flows, and the Profit and Loss Statement on revenues earned and
expenses incurred, and these may not be the same.