Cash flow | Business & Finance homework help

If extending credit creates profit without cash, and both profit and cash are needed to succeed, why would a company risk extending credit to customers?
Is accounts receivable outdated now that credit cards are pervasive?
Choose two concepts/topics you learned from the chapter that you found most interesting. Please briefly explain the concepts and why you found them to be the most interesting.



Everyone is familiar with cash. For financial purposes, cash includes cash and cash equivalents. Cash equivalents include cash, coins, checks, money markets, and anything that can easily converted to cash within 90 days. There are no assumptions or estimates in cash which is why many people prefer the statement of cash flow.

As mentioned in previous sections, cash is not the same as income or profit. Revenues are recognized when they are earned not necessarily when the cash is received. Expenses are recognized when they are incurred not necessarily when they are paid. Also, there are figures recorded in statements that do not involve cash at all such as depreciation and amortization.

The statement of cash flow or cash flow statement is all about cash. It shows cash inflows and outflows of a company for a time span. It explains how cash went from the beginning cash amount to the ending cash for the period. The time-span will be the same one used for the income statement. For profit and non-profit cash flow statements look and function the same.

Cash inflows and outflows are presented in three categories: Operating, investing, and financing. Operating items are day to day cash transactions summarized. Investing activities are cash transactions related to long-term assets such as buying, selling and investing. Financing activities are those involving long-term debt such as borrowing and paying back debt and cash transactions involving a company’s own stock.

The operating activities section of the statement can be calculated in one of two ways. The first way is the direct method. It approaches cash flows from operating activities by analyzing changes in current assets and liabilities. The second approach is the indirect method. This method starts with net income, adjusts out all non-cash transactions such as depreciation and then adjusts for any cash items that might be missing. Either method will result in the same answer.

The ending cash balance on the statement of cash flow should match the cash balance shown on the balance sheet. Significant non-cash transactions are presented in a separate non-cash investing and financing section.

Please explore the following video to gain a better understanding of the Cash Flow Statement:

Cash Flow Statement Explained by The Finance Storyteller

Weekly Commentary:

The section outline below highlights the main points of each section of your text, Financial Intelligence, and provides some additional commentary. It is a a good idea to read both for the best understanding possible.

Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean

Part Four: Cash is King

15. Cash Is a Reality Check

a.    Owner earnings

b.    Profit and cash are not the same

16. Profit ≠ Cash (and You Need Both)

a.    Revenue is recognized when earned not when cash is received

b.    Expenses are recognized when incurred not when they are paid

c.    Capital expenditures do not impact net income

d.    Non-cash items such as depreciation and amortization

17. The Language of Cash Flow

a.    No assumptions or estimates. Less room for manipulation.

b.    Cash inflow is positive. Cash outflow is negative. Net cash flow is the sum of inflow and outflow.

c.    Cash flow is difficult to understand without understanding the statements

d.    Three categories of cash flow: Operating, Investing and Financing

e.    Operating activities: Cash flows from day to day activities and cash interest paid or received

f.     Investing Activities: Cash purchase and sale of long-term assets, loans to other companies and collections of those loans

g.    Financing Activities: Borrowing funds, paying back those liabilities and cash transactions in a company’s own stock.

h.    Operating activity section shows current health

i.     Investing activity sections shows investment in the future

j.     Financing activity section shows how the company is financed

k.    Free Cash Flow

18. How Cash Connects with Everything Else

a.    Cash flow is calculated with the income statement and two balance sheets

b.    Basically undo the income statement to turn net income into net cash

c.    Steps for preparation

19. Why Cash Matters

a.    Shows cash position

b.    Where is cash coming from? Where is it going?

c.    Signs for the future

d.    Manager’s impact

20.     Toolbox

a.    Free Cash Flow = operating cash flow – net capital expenditures

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