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Flashcards in SAC 3 Deck (14):

Why would the loan have been taken out?

The loan may have been taken out to fund the purchase of office furniture and to prevent the firm's bank balance from falling into overdraft.


Explain why net operating cash flows are vital to the long-term success of the firm.

Net operating cash flows are results from the firms day-to-day operations. If the firm suffers from cash outflows from operating activities, it means the firm cannot generate sufficient cash from trading and will need to rely on external finances such as loans for assistance.


What are cash flows from financing activities?

Cash flows that have the effect of changing the financial structure of the firm. eg. Loan changes the claims of the assets of the business.


Why is there a net profit despite a cash decrease?

Under accrual accounting, profit is revenues earned less expenses incurred for the period and net cash flow is the result of comparing net cash inflows and outflows. Thus, profit and net cash flows are different measures. One reason for the firm making a net profit despite a decrease in cash is that credit sales exceeded receipts from debtors for the period. The revenue earned on sales increases net profit more than the cash received from debtors increased cash at bank. The cash purchase of office equipment represents a cash outflow that is not an expense. This outflow decreased cash at bank but left profit unaffected. This event leads to cash decrease more than profit.


What does the debit entry bank represent on the GST clearing Ledger?

GST settlement paid to the ATO, as an excess of GST received over GST paid occurred during the last period. The firm is required to settle the balance.


Why do trading firms usually have a GST liability?

Trading firms rely on selling goods at a markup to generate profit. This means the GST paid on stock and other purchases is less than the GST collected at firms, resulting in this liability.


What is the purpose of an income statement?

The purpose of an income statement is to provide the information to the owner regarding profit. It classifies revenues and expenses to provide information such as gross profit to allow the assessment of the adequacy of stock markup and net profit to show the firm's ability to control expenses.


Distinguish between Discount expense and Depreciation.

Discount expense represents a reduction in inflows of economic benefit in the form of a decrease in assets (debtors control) which will decrease owner's equity. On the other hand. depreciation of fixtures & fittings represents a consumption of economic benefits in the form of a decrease in assets (fixtures and fittings) which decreases owner's equity.


Discuss the benefits and costs of using Balance Day Adjustments, referring to relevant APs and QCs.

Balance Day adjustment are a results of adopting the accrual method of profit determination where profit is revenues and (irrespective of cash received) less expenses incurred (irrespective of cash paid). The going concern principle states that the life of the business is assumed to be ongoing and recognises that assets and liabilities have and an undetermined life. Reporting periods are allocated to divide the life of the business into periods in order for preparation reports and the accurate calculation of profit. The balance day adjustments have the function of adjusting revenue and expense accounts so that they reflect the amount earned and incurred within the period, rather then what has been paid or received. This ensures that the accurate profit has been calculated and insures relevance in reports. However balanced day adjustments require extra effort and time to prepare which may be costly for the business. Furthermore some balancing adjustments undermine the reliability of reports by using estimates. Ultimately the use of balancing adjustments should be incorporated in the business to provide useful information in decision making.


Why is the depreciation of NCA necessary to be recorded?

Depreciation allocates the cost of a NCA over its useful life. This allows the consumption of benefits to be recognised as an expense incurred is matched with the revenue the asset has assisted in earning so an accurate profit can be determined. The owner is able to make decisions of the basis of this profit, making it relevant.


Is depreciation considered to be reliable?

Depreciation is not considered to be reliable. Its calculation includes the use of two estimates: estimated useful life and estimated residual value. This breaches reliability as the information may be subject to bias and error and cannot be verified by source document.


Why is a residual value not included in the depreciation value?

The residual value is not part of the economic benefit that will be consumed by the firm and generate an inflow of economic benefits. This value will be consumed by another entity once it is sold and therefore should not be depreciated.


How would an expansion affect the business?

- Resulted in a cash outflow from operating activities as the firm may have to incur more expenses such as wages

- There has been a investing cash outflow as a result of purchasing more non-current assets to expand the business.

- There has been a cash inflow from financing activities, which is likely due to the need to fund new NCAs and cover operating activities.

- The firms balance has fallen into overdraft due to the expansion and the future balance will need to cover the expenses that have come up due to the expansion. - Not a good move


Are extracts of a cash flow statement enough to make decisions about cash performance?

No, although they can show overall impacts on cash, the specific impacts on cash performance can only be seen in a full cash flow statement. This information is needed to make corrective action such as reducing expenses (operating).