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Chapter 23 Answers

The document discusses cash flow, emphasizing its importance for business operations and distinguishing it from profit. It outlines cash inflows and outflows, the cash flow cycle, and the necessity of cash flow forecasting for effective financial management. Additionally, it addresses working capital and strategies to overcome short-term cash flow issues.

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8 views2 pages

Chapter 23 Answers

The document discusses cash flow, emphasizing its importance for business operations and distinguishing it from profit. It outlines cash inflows and outflows, the cash flow cycle, and the necessity of cash flow forecasting for effective financial management. Additionally, it addresses working capital and strategies to overcome short-term cash flow issues.

Uploaded by

emmanuelchembeni
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 23 Answers

1. Cash flow is the movement of money into and out of a business over a period of time. It is
crucial because insufficient cash can lead to problems like being unable to pay expenses,
halting production, and potential liquidation. [cite: 1, 2]

2. Cash inflows are the sums of money received by a business, such as from sales, payments
from debtors, borrowing money, sale of assets, and investments. Cash outflows are the sums
of money paid out by a business, such as for purchasing goods or materials, paying wages
and expenses, purchasing assets, repaying loans, and paying creditors. [cite: 3, 4, 5, 6, 7]

3. The cash flow cycle shows the stages between paying out cash for labor and materials and
receiving cash from sales. It is essential to purchase materials for production, which takes
time before sales to customers. If customers receive credit, cash inflow is delayed. Effective
cash flow planning is crucial to ensure funds are available at each stage, as issues like
insufficient cash, insisting on cash payments, or inability to pay bills can lead to business
failure. [cite: 8, 9, 10, 11, 12, 13, 14]

4. Cash flow is not the same as profit. Cash flow represents the actual movement of cash in
and out of a business, while profit is the surplus after total costs have been subtracted from
revenue. A business can be profitable but still have cash flow problems, especially if there
are lags between sales and cash inflow, such as when goods are sold on credit. [cite: 15, 16,
17, 18, 19]

5. Yes, a profitable business can run out of cash, leading to insolvency. This can happen due
to extended credit periods, excessive fixed asset purchases, or rapid expansion and high
inventory levels (overtrading), which can drain available cash. [cite: 18, 19, 20, 21, 22, 23,
24]

6. A cash flow forecast is an estimate of future cash inflows and outflows of a business,
usually on a month-by-month basis. It helps managers determine how much cash is
available, how much borrowing may be needed, and whether the business is holding too
much cash. [cite: 24, 25, 26]

7. Cash flow forecasts are used for various purposes: - Starting up a business: To plan and
ensure sufficient funding for initial expenses. - Keeping the bank informed: To support
loan applications and demonstrate financial planning. - Managing existing businesses: To
anticipate cash shortages, negotiate better loan terms, and avoid overdrafts. - Optimizing
cash flow: To identify excess cash and improve cash management. [cite: 27, 28, 29, 30, 31,
32, 33, 34, 35]

8. Net cash flow is the difference between cash inflows and outflows in a month. The closing
cash balance is the amount of cash held by the business at the end of each month, which
becomes the opening cash balance for the next month. The opening cash balance is the
amount of cash held at the start of the month. [cite: 36, 37]
9. To overcome short-term cash flow problems, businesses might attract new investors, cut
costs, increase efficiency, or develop new products. However, these solutions have potential
drawbacks, such as affecting ownership, employee morale, product quality, and the time
required for development. [cite: 38, 39, 40]

10. Working capital is the capital available to a business in the short term to pay for day-to-
day expenses. It is the difference between a company's current assets and current liabilities.
Working capital is essential for daily operations, enhances creditworthiness, allows
businesses to seize opportunities, and reflects financial health and efficiency. [cite: 40, 41,
42, 43, 44, 45]

11. The forms of working capital include cash for immediate expenses, accounts receivable
(money owed by customers), and inventory, which is crucial for production but incurs
holding costs. [cite: 46, 47, 48]

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