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Analysis of Cash Flows

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Seamus Wong:
Hello,

I know that the accounting exam is loaded with theory questions, so in preparation, I would appreciate if someone could review my answer to an analysis question, letting me know what I should remove, what I should add, what's wrong with it and how I can make it more concise.

here is the cash flow statement and my analysis of it.

Chapter 12: Exercise 8 - Cash flows: full statement               
a               
Pulsar Jetskis               
Cash Flow Statement for year ended 31 March 2023               
Cash flows from operating activities                
Cash sales                                                    90000    
Collection from Accounts Recevable            32000    
Commission                                                     1000    
GST collected                                                 9100    
Inventory                                                         (54040)   
Interest                                                           (1660)   
Advertising                                                    (6450)   
Cartage Inward                                            (1150)   
Wages                                                            (32060)   
GST Paid                                                     (9694)   
Net cash provided by Operating Activities                27046
               
Cash flows from Investing activities               
Delivery Truck                                                      5500    
Office Equipment                                              (12300)   
Delivery Truck                                                      (23000)   
Net cash used by Investing activities                      (29800)
               
Cash flows from Financing activities               
Capital                                                             5000    
Loan                                                              13000    
Loan repayment                                             (4700)   
Drawings                                                                  (17900)   
Net cash used by Financing activities                           (4600)
               
Net increase/decrease in cash held                      (7354)
Cash held at beginning of year: 1 April 2022               9245
Cash held at end of month: 31 March 2023               1891
               

Comment

Pulsar Jetskis experience a net decrease in cash held for the year ended 31 March 2023, of $7354. This could be considered as an unfavourable result. However, this decrease was primary due to a high level of investment in non-current assets during the period, and thus the cash position may be considered favourable due to the investment supporting increased efficiency of operations in future reporting periods. The firm generated $27046 from operating activities, which indicates favourable sales performance and expense control, allowing for the business to fund its investing and financing activities. $4600 was used in financing activities, with the majority of the outflow being traceable to the $17900 in drawings and the majority of inflow due to the $13000 loan. Although the loan may serve a productive function in the short-term, it is not a sustainable source of cash and may place a burden on the firms future cash position due to loan repayments and the associated interest expense. The cash performance of the firm is not indicative of the firms overall performance though, since net profit/loss has not been accounted for, nor has the cash position of the firm in prior reporting periods. Thus, in order to make a comprehensive anlaysis of the firms performance for the period, additional information is required



Thanks

jurisprudence:
Hi Seamus,

It’s great that you’re trying to get a head start on theory questions in VCE Accounting, as they often are an area that students struggle with! Generally when answering a theory question, you would look at the mark allocation and task word(s) to write an appropriate response, so it is difficult to state what you should remove/add without this.

However, here are some things that you could consider for a more complex response:

•The most important part of a cash flow statement is that a business is making a surplus in their operations. Emphasize how this allows the business to finance their operating and financing activities and indicates that the business is likely able to support itself in the long run.
• Regarding the operating activities, try to shift the focus away from revenues/expenses (such as sales and expense control), and towards cash inflows/outflows. It’s fine to mention these things, as the firm is generating cash sales and paying expenses using cash, but just make it clear to the assessor that you understand the difference between cash and profit.
• Show as much depth as possible in your response. Why is a net decrease in cash unfavourable? Here you could talk about how cash is a business’s most liquid asset, and a decrease in cash position means that a business is less able to meet its short-term debts as they fall due.
• Expenditure on items such as advertising may generate future sales and subsequently cash inflows.
• For the investing section, you could mention how typically this is an area of negative cash flows. A successful business will generally be purchasing assets to expand and continue operations in the future, rather than selling assets. Furthermore, the sale and purchase of a motor vehicle indicates an upgrade.
• For a complex response, you can try to recognize relationships between the areas. For example: perhaps the loan was used to help finance the investing activities/expansion. What impact does this have on the business?
• You could also explore alternatives that would have reduced the deficit. Would it have been better for the business to delay the purchase of new equipment?

Including all of these points would lead to a super detailed response. So be wary of time/mark allocation and prioritize the analysis that you think is the most important.

A structure that worked well for me was going through each component of the cash flow statement separately. For example:

•   What was the net effect on operations?
•   Is this favourable/unfavourable?
•   Are there any particular causes?
•   What does this further indicate about the business’s financial position?

I would then repeat this for investing and financing activities.

I really love the way that you’ve recognized that the loan may put burden on future cash flows of the business. Your use of the terms ‘favourable’ and ‘unfavourable’ is also really well done. You’ve also shown a good understanding of how other financial indicators and statements may allow for a more comprehensive evaluation of the firm’s performance.

Keep up the great work!

Seamus Wong:
Thanks so much for the feedback and advice! I will definitely be referring back to your dot points when completing these analysis questions. You are literally 1000X better than my teacher, thanks again for the help.

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