Literature Review on Cash Management Paper Text

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Developing a critical review of cash flow literature and any related issues help the researcher, manager and any potential reader to better understand the subject and also provide a framework for data analysis. Governance as stated in the uk charity commission standard for good governance code is the systems and processes concerned with ensuring the overall direction, effectiveness, supervision and accountability of an organization. This chapter begins with a clarified concept of cash flow as stated by the financial accounting standard board fasb and also develop and update and utility of cash flow when managing commercial activities. How the better knowledge on that topic helps in business decision making nowadays.

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The financial accounting standards board fasb introduced statement of financial accounting standards no. The requirement of fasb 95 regarding a full set of financial statements classified cash flow as the fourth required financial statement along with a balance sheet, income statement, and statement of retained earnings. This statement established standards for cash flow reporting, and dated out the accounting principles board apb opinion no. In march 1971, the apb opinion no.19 gave chances to enterprises to report cash flow information in a statement of changes in financial position commonly called a funds statement. During that time, there was no formal or universally accepted definition to catalogue each statement even though the term funds was not sufficiently defined alves et al 2008. Every single industry however had different funds constitution to others since the statement referred to changes in funds.

The term funds referred sometimes to cash for some company meanwhile some used cash and short term investment and some used quick asset, some used working capital. A cash flow statement is an important indicator of financial health because it is possible for a company to show profits while not having enough cash to sustain operations. It is a financial report that shows to the user the source of a company's cash and how it was spent over a specific period of time. A cash flow statement counters the ambiguity regarding a company's solvency that various accrual accounting measures create. It also categorizes the sources and uses of cash to provide the reader with an understanding of the amount of cash a company generates and uses in its operations, as opposed to the amount of cash provided by sources outside the company, such as borrowed funds or funds from stockholders.

The cash flow statement also tells the reader how much money was spent for items that do not appear on the income statement, such as loan repayments, long term asset purchases, and payment of cash dividends ryan 2007. Thornton 2008 indicated that fasb 95 requires a statement of cash flows to classify cash receipts and cash payments in accordance with the prescribe format whether they start from operating activities, investing activities, or financing activities. The provisions given by fasb are as follows on the presentation of cash flow statement are: it provides that the cash flows statement should be prepared under either direct or indirect method and provides examples of how to use each method when preparing statements. It also provides that under the core concept, cash is stated as cash and cash equivalents.

While cash is the most liquid assets within the asset portion of a company’s balance sheet including currency and bank deposit, in the other hand cash equivalents are asset that are ready to be converted into cash such as money market holding, short term government bond, bills, marketable securities and commercial paper. Other sources of investments such as stocks, bonds, futures contracts, and so forth are not considered cash. Cash is one of the most important aspects of running any large or small business. It is one of the single most important reasons why many businesses fail regardless of how good the business is. The physical aspect of cash can be any currency, coins on hand, bank balances, negotiable money and so forth. Managing cash flow therefore is vitally important in the soft running, survival and success of a business atrill p.

The use of some examples has illustrated how cash flow can make the difference between success and failure. The meaning of failure in this case is insolvency that is, the company is unable to pay its debts. The term bankrupt is sometimes used to describe that situation, even though it is only individual who can be declared bankrupt. Also known as profitability, non cash transactions are not included in the statement of cash flows, but often they need to be disclosed elsewhere in financial statements. Examples of these types of transactions include: conversion of bonds to stock acquisition of assets by assuming liabilities.

When there are some few of such transaction, it may be fairly recommended to include them on the same page as the statement of cash flows but in a separate schedule at the bottom of the statement of cash flows. Otherwise, the transactions may be reported elsewhere in the financial statements, clearly referenced to the statement of cash flows. Some other transactions are generally reported in combination with statement of cash these include stock dividends, stock splits, and appropriation of retained earnings.

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Nearly all business transactions completed during the fiscal year impact cash flow in one way or another, and in summary form they are factored into the year's cash flow statement. As noted, the three essential categories of cash flow are operating activities, investing activities, and financing activities. Operating activities are the fundamental transactions that keep the business running. Most notably, they include incoming revenue also known as net income from the sale of goods or services and most kinds of outgoing payments. Cash flow from operating activities doesn't include principal paid on or received from loans, and only includes transactions that were completed during the period. This simply means that an operating transaction is not considered cash flow until the cash is actually received or paid, as opposed to just being recorded as accounts receivable or payable. In general, if an activity would appear on the company's income statement, it would be a candidate for the operating section of the cash flow statement.

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