Imagine you are the finance manager of Al Mohsin Company. The company management feels that the cash management of the company should be made more effective. The following information from the company’s records is available to you: Additional Information Miscellaneous Month Sales Purchase Wages expenses February 40,000 20,000 7,000 1,000 March 55,000 14,000 8,000 3,000 April 60,000 28,000 9,000 2,000 May 74,000 30,000 9,000 2,000 June 90,000 32,000 8,800 3,500 Al Mohsin LLC expects to have RO 8,000 cash balance at the beginning of April. Period of credit allowed by suppliers – 2 months 40% of the total sale is for cash. Half of the credit sale is collected in the next month of sale and the remaining half in the following month after that. Delay in payment of wages 1/4 month Delay in payment of expenses 1/2 month Income tax to be paid in the month of June RO 1,500.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Imagine you are the finance manager of Al Mohsin Company. The company management feels that the cash management of the company should be made more effective. The following information from the company’s records is available to you:
Additional Information
|
|
|
|
|
Miscellaneous |
|
Month |
Sales |
Purchase |
Wages |
expenses |
|
February |
40,000 |
20,000 |
7,000 |
1,000 |
|
March |
55,000 |
14,000 |
8,000 |
3,000 |
|
April |
60,000 |
28,000 |
9,000 |
2,000 |
|
May |
74,000 |
30,000 |
9,000 |
2,000 |
|
June |
90,000 |
32,000 |
8,800 |
3,500 |
- Al Mohsin LLC expects to have RO 8,000 cash balance at the beginning of April.
- Period of credit allowed by suppliers – 2 months
- 40% of the total sale is for cash. Half of the credit sale is collected in the next month of sale and the remaining half in the following month after that.
- Delay in payment of wages 1/4 month
- Delay in payment of expenses 1/2 month
- Income tax to be paid in the month of June RO 1,500.
You are required to :
A-Prepare an estimate of cash position for three months from April to June.
B-Based on the budget prepared, evaluate the cash position of the company, give your comments and provide suitable suggestion to the management on effective cash management.
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