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23 Cards in this Set

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  • Back
What type of accounting does the cash flow statement use?
Cash accounting
If the accrual is created by a cash transaction, then what must happen?
It must be reversed by a non-cash transaction
Purpose of a cash flow statement?
- to identify the sources and uses of cash during the year
- to highlight the material operating, financing and investing activities of the entity during a financial period
Why is cash flow data important?
As it is highly reliable and less subject to estimation/manipulation than accrual accounting
Cash flows
inflows and outflows of cash and cash equivalents
Cash Equivalents
Short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value
What does each transaction involve?
- A movement of cash
- An external entity/party (i.e. someone to pay cash to/to receive cash from)
________ and ___________ are used in day-to-day cash management.
Cash and highly liquid investments
What are examples of cash and highly liquid investments?
Notes, coins, demand deposits
What else does cash include?
Borrowings (at call) used int he day-to-day cash management
e.g. bank overdraft
Are AR and AP included?
Why is cash important?
Because organisations and people will not normally accept any other form of settlement of claim against the business
Why do businesses fail?
As a result of an inability to find sufficient cash to settle their responsibilities
When Equity (A-L) becomes negative because liabilities exceed assets and the entity is not in a position to use assets to pay off liabilities
Legal bankruptcy
Bankruptcy from an accounting point of view
Default on liabilities
When you do not have enough cash to pay a current liability even though you have lots of assets
You can be in ___________ without actually being _____________
default, bankrupt
Cash is....
the pre-eminent business asset and therefore the one that analysts and others watch carefully in assessing survivability of the business
Balance Sheet
- static report made at a given point in time
- based on balances in assets, liabilities and OE
- normally based on accrual transactions
Income Statement
- measures the financial performance over a period of time (normally a year)
- related to revenues earned less expenses incurred
Cash Flow Statement (differences)
- identifies all cash receipts and cash payments for the period
- based on cash, not accrual, transactions
- incorporates all account types
--> Has operations generated more cash than was spent
What does the cash flow statement help users to do?
- Assess the ability of the business to generate cash flows
- Assess the financial performance and financial position of the entity
- Assess where the entity has spent cash and received cash from
- Ass the entity's ability to generate further cash flow
What does the cash flow statement explain?
The changes in the cash balances between two balance dates (i.e. it explains changes in cash between start and end of financial period)