Chapter 18

Cash and Cash Flows

 Objective of the syllabus

Upon the end of the topic, student should know

• The cash flow cycle
• Types of cash transaction
• Distinguish between profit and cash flows
• Cash accounting and Accruals Accounting
 The cash flow cycle
• A business which fails to make profits will go under in the long term.
However, a business which runs out of cash, even for a couple of
months, will fail, despite the fact that it is basically profitable.
• Working capital is the difference between a firm’s current assets and
current liabilities. There are assets or liabilities which are, or can be
turned into cash.
• Working capital is the net difference between current assets (mainly
inventory, receivables and cash) and current liabilities (such as payables
and a bank overdraft)
• The working capital cycle measures the period of time between cash
outflows for materials and cash inflows from customers
• Refer text book page 332
 Working Capital Cycle
Months
Raw materials inventory turnover period XX

Less: credit taken from supplier (XX)

Finished goods inventory turnover period XX

Receivables’ payments period XX

Working capital cycle XX

Refer text book page 333

 Example : The cash flow cycle
Dunelm (Engineering) Co buys raw materials from suppliers on four weeks credit and
they are delivered immediately. When the raw materials are received, they are held in
the warehouse for five weeks before being used in production. The production
process takes one week and the completed goods are held for two weeks before finally
being sold to credit customers. These customers are allowed a maximum credit period
of six weeks but pay after three weeks in order to obtain a discount for prompt
settlement

What is the operating cash cycle of the business?

A. 7 weeks
B. 10 weeks
C. 11 weeks
D. 12 weeks
 Types of cash transaction
• Cash transactions can be capital or revenue, exceptional or unexceptional and
regular or irregular

Work for students:

Find example for cash outflows and cash inflows in the business. You can
refer text book page 334 and 335 to find more
 Profit and Cash Flows
• Accounts showing trading profits are not same as
statements of cash flows
• Profit = Sales – Cost of Sales
• Operational Cash Flows = Cash in – Cash out
• Notes:
Cash in = Sales + Opening receivables – Closing receivables
Purchases = Cost of Sales + Closing inventory – Opening inventory
Cash out = Purchases + Opening payables – Closing payables
(Refer text book page 335 and 336)
 Example
• Assume that Beta achieved sales turnover in a particular year of $200,000 and
the cost of sales was $170,000. Inventories were $12,000, payables $11,000
and receivables $15,000 at the start of the year. At the end of the year,
inventories were $21,000, payables were $14,000 and receivables $24,000.
Find out the profits and the operational cash flow resulting from the year’s
trading
 Answer
Profits ($) Operational
cash flow ($)
Sales 200,000 200,000
Opening receivables ( received in year) 15,000
Closing receivables (outstanding at year end) (24,000)
Cash in 191,000
Cost of sales (170,000) 170,000
Closing inventory ( bought, but not yet used, in year) 21,000
Opening inventory ( used, , but not yet bought, in year) (12,000)
Purchases in the year 179,000
Opening payables ( paid in year) 11,000
Closing payables (outstanding at year end) (14,000)
Cash out 176,000
Profit / operational cash flows 30,000 15,000
 Reconciliation
$ $
Profit 30,000
Less increase in receivables (9,000)
Less increase in inventory (9,000)
Plus increase in payables 3,000 (15,000)
Operational cash inflows 15,000
 Cash accounting and Accruals
Accounting
• Cash budgets are not prepared according to the accruals concept,
which tries to ensure income and expenditure are matched.
Instead they are prepared on a cash (receipts and payments) basis.
• Accruals basis of accounting. The effect of transactions are
recognized when they occur (rather than when the cash is
received or paid) and they are recorded in the periods to which
they relate
 Example
• Brenda has a business importing and selling model Corgi dogs. In May 20X7
she makes the following purchases and sales
Invoice date Number Amount ($) Date paid
bought/sold
Purchases
7.5.X7 20 100 1.6.X7
Sales
8.5.X7 4 40 1.6.X7
12.5.X7 6 60 1.6.X7
23.5.X7 10 100 1.6.X7

What is Brenda’s profit for May?

 Solution
$
Cash basis
Revenue 0
Purchases 0
Profit/loss 0

Accrual basis
Sales ($40+$60+$100) 200
Purchases (100)
Profit 100

Refer text book page 338 and 339

 Example
The following were the only transactions in the first trading period of a new business:
• Credit sales: $140,900
• Receipts from customers: $118,700
• Credit purchases of goods: $96,600 (there was no inventory at the end of the period)
• Payments to suppliers of goods: $72,000
• Purchase of, and payment for, a machine: $20,000 (the machine is depreciated on a straight-line
basis over 20 periods, assuming nil residual value)
• Expenses incurred and paid for: $17,800 

Comparing accrual accounting and cash accounting, what is the difference in the surplus
for the period?
A $16,600
B $17,600
C $2,400
D $3,400
 Chapter 19
Cash and Treasury
Management
 Objective of the syllabus

Upon the end of the topic, student should know

• The treasury functions
• Cash handling procedures
• Describe how trends in the economic and financial environment can affect
management of cash balances
 The role of the treasurer
• The Association of Corporate Treasurer has listed the experience it will require from its student
members before they are eligible for full membership of the Association (ACT, 2016). This list of
required experience gives a good indication of the core roles of treasurership

(a) Corporate financial objective

• Financial aims and strategies
• Financial and treasury policies
• Financial and treasury systems

(b) Liquidity management

• Working capital and money transmission management
• Banking relationships and arrangement
• Money management
 The role of the treasurer
(c ) Funding management
• Funding policies and procedures
• Sources of funds
• Types of funds

(d) Currency management

• Exposure policies and procedures
• Exchange dealing, including futures and options
• International monetary economics and exchange regulations
 The role of the treasurer
(e) Corporate finance
• Raising share capital
• Its form ( ordinary or preference, or different classes of ordinary shares)
• Obtaining a stock exchange listing, dividend policies
• Financial information for management
• Mergers
• Acquisition
• Business sales

(f) Related subjects

• Corporate taxation (domestic and foreign tax)
• Risk management (swaps, options) and insurance
• Pension fund investment management

(Refer text book page 344 and 345)

 Cash handling procedures
• Cash handling procedures should prevent fraud or theft

• Objective : the most important objective of cash handling procedures relating

to cash receipts and payments are:
All monies received are recorded
All monies received are banked
Cash and cheque are safeguarded against loss or theft
All payments are authorized, made to the correct recipients and recorded
Payments are not made twice for same liability

(Refer text book page 345)

 Cash handling procedures
• Key procedures:
Cash handling procedures relating to receipts include:
• Proper post-opening arrangement
• Prompt recording
• Prompt banking
• Reconciliation of records of cash received and banked

(Refer text book page 345, 346 and 347)

 The economic and financial environment
• Work for students
We will discuss this in online class, so please read the text book page 348
 Chapter 20
Forecasting Cash Flows
 Objective of the syllabus
• Upon the end of the topic, student should know
• Objective of cash budgeting
• Prepared cash budget or forecasting
• Illustrate statistical techniques used in cash forecasting including moving
average and allowance of inflation (index number)
 Objective of cash budgeting
• to show the cash effect of all plans made within the budgetary process.
• to ensure that sufficient cash is available at all times to meet the level of
operation.
• to take necessary actions in advance to meet any cash deficiency.
• to take steps in advance to invest any cash surplus in short term investments
• to manage cash of the firm to attain maximum cash availability
• Cash budget is a detailed budget of cash inflows and outflows incorporating both revenue and capital
items.
• It is a statement in which estimated future cash receipts and payments are tabulated in such a way as
to show the forecasted cash balance of a business at defined intervals.

• A cash budget can be viewed as comprising 3 parts:

i. the cash inflows (receipts)
ii. the cash outflows (payments)
iii. the net cash flows (the difference between the cash inflows and the cash outflows).

• The opening cash balance is added to the net inflow/outflow to provide the available cash balance at
the end of the period. The closing cash balance at the end of each period represents the opening
balance for the next period.
• The annual cash budget is usually broken down into much shorter periods: weeks, months, quarters
or half-years.
• Cash budgets do not recognize non-cash transactions such as depreciation or provisions.
Items in Cash Budget
• A cash budget is prepared to show the expected receipts of cash and payments of cash
during a budget period.
Receipts of cash Payments of cash

Cash sales Cash purchase

Items to be
Payment by receivables (credit sales)  Payment to payables (credit purchase) excluded in a
cash budget:
The sales of nob-current assets  Purchase of non-current assets
 Depreciation
The issue of new shares or loan stock  Payment of wages/ salaries costs  Discounts
 Any
The receipt of interest and dividends  Payment for other expenses Provisions
 Irrecoverable
Receive loan  Payment of interest, dividends or taxation debts
 Example
An overhead cost budget for the next calendar year includes:
• Depreciation charged on a straight-line basis at $11,200 per month;
• Machine maintenance of $5,900 per quarter, payable in advance in January, April, July and
October.
The remaining overheads, of $207,600 for the year, are budgeted to be incurred at an even rate per
month, payable one month in arrears. The expected accrued overhead, at the end of the calendar year
prior to the budget year, is $16,800.

What amount of overhead should be included in the cash budget for January?
A $23,200
B $22,700
C $33,900
D $28,500