QCAA Accounting Cash management

The business significantly increased its borrowing (proceeds of ＄75,000 compared to ＄25,000 in the previous year). Higher reliance on debt financing increases financial risk (gearing), which weakens financial stability.

Payments to suppliers are classified as operating activities, not financing activities, and are not listed in this extract. The extract shows payments for drawings and loan repayments.

While the net cash inflow increased, it was driven by taking on more debt. Increased debt obligations generally reduce long-term financial stability, even if they provide immediate liquidity.

The lack of capital contributions forced the business to rely on external debt to generate cash. Relying on debt rather than equity increases financial risk, rather than improving stability.

This is incorrect because the decrease in accounts receivable days (from 90 to 70) indicates faster payments, not slower, and the decrease in inventory turnover (from 5 to 3.5 times) means inventory is moving slower, not quickly.

The reduction in accounts receivable turnover from 90 to 70 days means customers are settling debts faster (more quickly). Simultaneously, the decrease in inventory turnover from 5 to 3.5 times indicates that stock is being sold less frequently, meaning it is moving slowly.

This is incorrect because accounts receivable are being paid faster (fewer days to collect), and a lower inventory turnover ratio (dropping from 5 to 3.5) represents a decline in efficiency, not an improvement.

While it is true that accounts are being paid more quickly, the inventory turnover has not improved; it has deteriorated from 5 times to 3.5 times, indicating slower sales.

A bank loan is classified as a financing activity. This increases the total cash inflows (the denominator) while operating cash flows (the numerator) remain unchanged, causing the ratio to decrease.

Net profit is an accrual accounting figure that includes non-cash items and credit sales. An increase in net profit does not guarantee a direct or equivalent increase in cash flow from operations.

The cash generating power ratio is calculated as $\frac{\text{Cash Flow from Operations}}{\text{Total Cash Inflows}}$. Cash sales directly increase the numerator (operations) and the denominator; mathematically, adding the same positive value to both the numerator and denominator of a fraction less than 1 increases the value of the fraction.

The sale of a building is an investing activity. This increases total cash inflows (the denominator) without affecting operating cash flows (the numerator), which results in a lower ratio.

The fiscal year-end is determined by the parent company's existing policy and is not typically altered simply by acquiring a new subsidiary.

Acquisitions disrupt the consistency of financial data over time because the post-acquisition results include assets and revenues that were not present in prior periods. Furthermore, harmonizing the acquired company's cash-basis records with the public company's accrual-basis reporting adds complexity to historical comparisons.

Horizontal analysis compares financial data over time; an acquisition significantly changes the scale of the financial statements, which directly distorts trend analysis.

Industry benchmarks are aggregate standards derived from the entire sector; a single acquisition by one firm generally does not have the weight to shift benchmarks for the whole industry.