University:
Stanford University
Course:
ACCT 152 | Introduction to Financial Accounting
Academic year:

2023
Views:

120

Pages:

2
Author:

Seribu D

Cash Flow Analysis In order to produce a statement of cash flow some assumptions must be made: • All clients pay advance deposits equal to half the total bill during the month prior to the party, and they pay all balances due on the day of the party. • Costs of goods sold and operating expenses are paid in the month following the event. Administrative and general expenses and payroll and related expenses are paid in the same month. This example does not include any startup expenses. These will vary significantly from caterers with none to those with six-figure amounts. This example will simply address cash flows from operations. This example does assume that our off-premise caterer purchased a $3,000 insurance policy, with payment terms as follows: • One-third down payment of $1,000 in January • Ten equal monthly payments of $200 per month from February to December The cost of interest expense for this policy is included in the $3,000 total cost. In January, although the records indicate a loss of $2,157, this hypothetical offpremise caterer actually generated a positive cash flow due to the receipt of advance deposits and not paying for cost of goods sold and operating expenses until February. The impact on February follows: February Receipts Revenue (half of month's sales revenue) (First half was received in January as advance deposits for February) $1,500 Advance deposits (half of March) Total cash receipts $5,500 4,000 February Cash Expenses Cost of goods sold for January 667 Operating expenses for January 800 February payroll and related 1,990 February administrative and general 750* Total cash disbursements $4,207 *As in the previous example, the cash disbursement for administrative and general expenses is actually only $200, which is $50 less than the budgeted amount. Cash increase during February = $1,293 Cash balance at beginning of the month = 60 Cash balance at end of month = $1,353 Again, in spite of a loss, a positive cash flow was achieved. Interested readers can continue this exercise throughout the year and project the positive and negative cash flows for the remaining ten months of the year. It is important to understand the inherent differences between cash flow and income and expense accounting. Income and expense accounting is a true measure of the profitability of a business; whereas cash flow accounting simply keeps track of cash as it flows in and out of the business. Both are important. However, without positive cash flow, you will not stay in business.