Operating cash flow is the cash flow generated from the regular activities of a business. Operating cash flow starts with net income from the income statement, adds back in cash, and then incorporates any changes (adding or subtracting) in working capital. Show
To create a strategy that avoids declines in cash from operations, businesses should focus on maximizing net income and optimizing efficiency ratios. The following factors will all decrease cash flow from operating activities: 1. Decrease in Net IncomeThe cash flow statement begins with net income, which is equal to revenues minus all costs, including taxes. As operating cash flow begins with net income, any changes in net income would affect cash flow from operating activities. If revenues decline or costs increase, with the resulting factor of a decrease in net income, this will result in a decrease in cash flow from operating activities. 2. Changes in Working CapitalThe most significant uses of cash from operating activities are the changes in working capital, which includes current assets and current liabilities. Increases and decreases in current assets and liabilities are reflected in the cash flow statement. Growth in assets or decreases in liabilities from one period to another constitutes a use of cash and reduces cash flows from operations. Working capital management is evaluated by efficiency ratios such as inventory turnover, days sales outstanding, and days payable outstanding. Lower Inventory TurnoverInventory turnover is calculated by finding the ratio of sales in a period to inventories at the end of the period. Lower inventory turnover usually indicates less effective inventory management. Poor inventory management expands the level of inventories on the balance sheet at any given time, meaning inventory is not being sold. This is a use of cash that decreases cash flows from operations. Growth in Days Sales OutstandingDays sales outstanding measures how quickly a company collects cash from customers. This metric is calculated by multiplying the number of days in a period by the ratio of accounts receivable to credit sales in the period. If days sales outstanding grows, it indicates poor receivable collection practices, meaning a company isn't getting paid for items it sold. This leads to higher current assets, constituting a use of cash that decreases cash flows from operating activities. Decline in Days Payable OutstandingDays payable outstanding measures how quickly a business pays its suppliers. It is calculated by multiplying days in the period by the ratio of accounts payable to cost of revenues in a period. When days payable outstanding declines, the time it takes for a company to settle up with its suppliers declines, meaning it is paying its suppliers faster and money is out the door sooner. This reduces accounts payable on the balance sheet. Reducing current liabilities is a use of cash, and this decreases cash flows from operations. The Bottom LineCash flow from operations is an important metric that tells how much cash a company is generating from its business activities. It derives much of its function from the income statement and the balance sheet statement, such as net income and working capital. A change in the factors that make up these line items, such as sales, costs, inventory, accounts receivable, and accounts payable, all affect the cash flow from operations. 1. LO 9.1Which of the following is not a common goal of an organization? 2. LO 9.1Which of the following does not describe a management control system?
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LO 9.1In centralized organizations, primary decisions are made by ________.
4. LO 9.1A key advantage of a decentralized organization is ________.
5. LO 9.1Strategic decisions occur ________.
6. LO 9.2Segments are uniquely identifiable components of the business and can be categorized by all of the following except ________.
7. LO 9.2Organizational charts ________.
8. LO 9.2In a centralized organization, where are goals established?
9. LO 9.2Managers in decentralized organizations make decisions relating to all of the following except ________.
10. LO 9.3Which of the following is not a type of responsibility center?
11. LO 9.3A system that establishes financial accountability for operating segments within an organization is called ________.
12. LO 9.3A responsibility center in which managers are held accountable for both revenues and expenses is called a ________.
13. LO 9.3A responsibility center structure that considers investments made by the operating segments by using a common cost of capital percentage is called ________.
14. LO 9.3An important goal of a responsibility accounting framework is to help ensure which of the following?
15. LO 9.4Costs that a company or manager can influence are called ________.
16. LO 9.4An example of an uncontrollable cost would include all of the following except ________.
17. LO 9.4Internal costs that are charged to the segments of a business are called ________.
18. LO 9.4A transfer pricing arrangement that uses the price that would be charged to an external customer is a ________.
19. LO 9.4A transfer pricing structure that considers the opportunity costs of selling to internal rather than external customers uses ________.
What does efficiency variance measure?What Is Efficiency Variance? Efficiency variance is the difference between the theoretical amount of inputs required to produce a unit of output and the actual number of inputs used to produce the unit of output. The expected inputs to produce the unit of output are based on models or past experiences.
Which of the following unfavorable cost variances would be the least relevant in evaluating the performance of a production supervisor?Answer and Explanation:
The least controllable standard costing variance is the overhead volume variance.
Which of the following can be used to calculate the material uses variance?The formula for calculating the material usage variance is: MUV = (Standard Quantity – Actual Quantity) x Standard Price.
When the actual amount of raw material used in production is less than the standard?If the actual quantity of materials used is less than the standard quantity of materials allowed for the actual output, then the journal entry to record the Direct Material Quantity Variance would be a debit.
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A manager would like to see a decreasing trend in all of the following operating measures except
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