ACCOUNTING in a business context 4th EDITION – AIDAN BERRY & ROBIN JARVIS
 Course: Accounting & Controlling
Chapters: 1-13, 21
Chapter 1: Introduction to accounting
PPT 1-2-3
Influences on accounting:
- Increased globalisation (national and international boundaries - legislation)
- Environment (level of legislation, regulatory standards, impacts of new technology)
Accounting:
 Generally about quantitative (numerically) information;
 The information is likely to be financial;
 It should be useful for making decisions.
For what purpose is accounting used?
1. Individually  planning, controlling and decision support.
2. Enterprise  control activities of organization, plan future activities, assist in raising
finance, and report upon the activities and success of the enterprise to interested parties 
thus, also an external function.
Who uses accounting information?
 Internal users  inside the enterprise: owners, managers, etc.
 External users  outside the enterprise: shareholders, banks, lenders, government, tax
authorities, suppliers, customers, employees, etc.
Financial accounting: that part of the accounting system that tries to meet the needs of the various
external user groups. This it does by means of an annual report which usually takes the form of a
balance sheet, income statement and cash flow statement.
 Accounting: process of producing and consuming mostly financial info for decision making of
internal and external stakeholders
Decision Making of external stakeholders:
• Early problem identification
• Engage commitment to the organization
Decision Making of internal stakeholders:
• Problem solving and opportunity seeking
• Control
• Plan
• Fundraising
Internal users
 Managers
 Employees
 Owners
 Partners
 Shareholders
 Preference shareholders
 Needs of the external users
 Owners/shareholders:
- be able to compare the results of one enterprise with the results of others
- know how the enterprise is going to fare in the future
- interested in profitability
 Lenders
- interested in seeing that an enterprise is making sufficient profit to provide them with their
return (interest)  income statement
- interested in ensuring that the enterprise will be able to repay the money it has borrowed
- need to know what the enterprise owns and what it owes and how money flows in to and
out of the enterprise  balance sheet and cash flow statement
 Suppliers of goods and services
- interested in profitability of getting interest and capital back
- interested to know whether the enterprise is likely to stay in business and whether it is
likely to expand or contract (liquidity, risk, profitability and future growth)
 Customers
- interested in an enterprise’s ability to survive and therefore to carry on supplying them
with goods  partially by income statement, balance sheet and cash flow statement
- interested in stability, solvency, profitability
 The employees
- interested in whether the enterprise is likely to survive  income statement
- interested in how well the enterprise is doing, compared with other similar enterprises
- profitability & liquidity
 The government
- taxes  needs to know how much profit has been made  income statement
- uses accounting information to produce industry statistics for the purposes of regulation
 The general public
- informing about the ability of an enterprise to absorb the additional costs of providing
pollution controls
Thus, everybody is interested in profitability.
The lenders, employees and auditors are interested in liquidity (= cash movements).
The owners, lenders, suppliers and auditors are interested in wealth.
Internal versus external?
- Internal user: produces the accounting info and consumes it.
- External user: consumes the info accounting; is dependent on the internal user for
sharing that info
In het annual report of an organization are three types of financial statement:
1. Balance sheet  accumulated wealth at a point in time.
2. Income statement (profit and loss account)  measures any profit or loss generated in
the period.
3. Cash flow statement  shows the movements in cash over the period.
Accounting is only one of a number of sources of information available to decision makers.
Chapter 12: Financial statement analysis
PPT 1-2-3
The user groups:
 Investor group
 Preference shareholders
 Lenders
- short-term creditors  trade creditors: those who supply the business with goods on
credit
- medium-term lenders  bankers and other financial institutions
- long-term lenders  almost same as medium, except if they are ‘secured’ lenders:
someone who has a legal charge on the assets of the business and can claim those assets
if the business does not repay or service the lending in accordance with the lending
agreement.
 Employees
 Auditors
 Management
Financial analysis: requires that the person for whom the analysis is being done is clearly identified
together with the purpose of the analysis. It is unlikely to be useful if it does not take into account as
many relevant factors as possible.
Factors that are directly relevant to any analysis of business performance:
1. Size of the business
2. Riskiness of the business
3. Economic, social and political environment
4. Industry trends, effects of changes in technology
Over the last 20 or more years there have been a number of proposals for taking account of price
changes in corporate reports, none of which has gained general acceptance.
Financial analysis must relate not only to what was happened but also to what is going to happen, a lot
of information will have to be obtained from other sources.
Sources external to the business
- government statistics
- trade journals
- financial press
- databases
- specialist agencies
Sources internal to the business
- annual report and accounts
- main statements and explanatory material
* income statement  summarizes the revenue and expenses for the period.
* cash flow statement  relates to the period and provides information about the
origin of the cash coming into the business and how that cash was spent.
* balance sheet  info about the position at a point in time
* notes to the account  here you’ll find a further explanation of the contents of
the summarized statements
* the accounting policies statement  here you’ll find info to understand the
basis which has been adopted
Basic accounting concept of consistency: an accounting policy once adopted
should not be changed from year to year. This is applied fairly rigorously to most
limited companies as their financial reports are covered by legislation and are
subject to an audit report.
- subsidiary statements
* statement of total recognized gains and losses  here you’ll find other gains or
losses that arise from holding assets that are required to enable the enterprise
to continue.
* reconciliation of movements in shareholders funds  shows the major changes
in the owners’ equity i.e., the shareholders’ funds. (Includes any profits or losses
made, dividends, new shares issued or shares bought back by the company).
- supplementary information (aanvullende info)
* Chairman’s statement  included with the annual accounts (personal overview
of the company’s financial performance, strategy and future prospects); it often
highlights only the positive side.
* review of operations  viewed as the chief executive’s overview of the business
and it normally contains a review of the various components of the business
and how they are performing.
* directors’ report  statutory requirement, the information contained in it is
laid down in the Companies Acts.
* operating and financial review  has two parts: operating review (relates to
the companies results, profits and dividend) and financial review (covers items
such as changes in capital structure).
* auditors’ report  annual audit of the accounts of a company, this includes a
report from the auditors stating whether in their opinion the accounts show a
‘true and fair’ view. (Mostly for small companies/partnerships).
* statement of corporate governance  This statement has to be include in the
annual report. The contents include risk management, treasury management,
internal control, going concern and auditors.
THE COMMON NEEDS:
 Profitability
- It requires comparisons:
* over time (more profitable than it was last year?);
* with other businesses (more profitable than a (dis)similar business?).
- It relates to:
* the past for evaluation;
* the future for prediction (via combination of information including past profits,
knowledge of the industry, predictions about the economy, etc.).
 Liquidity
- Asset’s ability to be sold without causing a significant movement in the price and with
minimum loss of value.
 Financial risk
- Involves long-term and short-term solvency;
- Requirements and norms differ widely from industry to industry.
How to measure financial risk  look at the balance sheet of a business and identify the amount of
debt finance (loans, debentures, bank overdrafts and other borrowing » schuldfinanciering) and
compare this with the amount of equity finance (owners’ capital plus reserves).
 Liquidity and financial risk are both related to the financing of the business.
TECHNIQUES OF ANALYSIS
 Comparison of financial statements over time (consider of: absolute amount/percentage
terms, absolute/relative figure, which period, other factors).
Trend analysis  in trend analysis the choice of an appropriate base year is vital, if the base year
chosen is not typical the resultant analysis will at best be extremely difficult and at worst actually
misleading. (Normally used for time periods in excess of two to three years in order to make the
results easier to understand and interpret).
- Index number trends
 Choosing a base year, and setting that base year to 100 and expressing all other years in
terms of that base year. Base year below the dividing line. _2002 sales_ x 100
2001 sales
» 2001 = base year.
The use of index numbers allows us to compare this company with another irrespective
(ongeacht) of size.
- Percentage changes
 Identify the percentage change from year to year and then examine the trends in this. For
example, if we look at the sales we find that the change from 2001 to 2002 was 7%, whereas
that from 2002 to 2003 was 27%. These figures are calculated using the following formula:
_ this year’s sales _ x 100
last year’s sales
COMMON SIZE STATEMENTS  turn the large numbers into more digestible information, it
involves expressing the items in the balance sheet, for example, as percentages of the balance sheet
total.
RATIO ANALYSIS
Ratio: a ratio R is quantity A divided by quantity B.  R = _
A_
B
In essence a ratio is merely a shorthand notation for the relationship between two or more things. It
is the relationship that it is expressing that must be understood. Without that understanding, the
ratio, no matter how precisely calculated or sophisticated, is meaningless.
Classification of ratios
Profitability ratios
 Gross profit margin (brutowinstmarge) = _ gross profit _ x 100 (%)
sales
 Net profit margin (nettowinstmarge) = _ net profit _ x 100 (%)
sales
Ratios which combine figures from a flow statement (income statement/cash flow statement), with
those from a static statement (balance sheet), it is better to use the average of the opening and
closing balance sheet figures.
 Return on capital employed (rendement geïnvesteerd vermogen) =
_
profit before tax and interest
_ x 100 (%)
average shareholder’s funds + loans
 Most common ratio used for measuring the profitability relative to the capital
employed to generate those profits (gives a picture of how the business as a whole is
doing from the point of view of the shareholders).

Return on equity (rendement eigen vermogen) = _ profit after tax and interest x 100(%)
average shareholder’s funds
How the business is doing so they may want to see the return that is available for the business.
Efficiency ratios
In the case of businesses we can look at the efficiency with which they use their assets by comparing
the average assets from the balance sheets with the appropriate figures from the income statement.
_
average assets from balance sheet
_ x 100 (%)
appropriate figures from income statement
Inventory turnover: measures the number of times the inventory is turned over each year.
 The faster you turn the inventory over the less money you have tied up (vastgehouden) in this at
any point in time and the cheaper your inventory holding costs are.  use AVERAGE figures!
Inventory turnover-times = _
cost of sales
_
average inventory
Inventory turnover-days = _ average in inventory _ x 365 (days)
cost of sales
Receivables and payables turnover: these ratios provide us with a measure of how quickly we are
collecting money from our customers and how quickly we are paying our suppliers.
Receivables turnover-days = _ average receivables _ x 365 (days)
(normal) sales
Payables turnover-days = _ average payables _ x 365 (days)
cost of sales
Example on page 275.
Financial risk ratios (and liquidity)
Long-term liquidity
Gearing ratio = _
long-term debt
_ x 100 (%)
(16%)
long-term debt + equity
Debt equity ratio = _ long-term debt _ x 100 (%)
(18%)
equity
 These shows that long-term debt is less than 20% of equity. These ratios may only show part of
the picture as they only relate to long-term borrowing. It is always advisable to look at the ratio of
total debt to total long-term finance (see below):
Full gearing ratio = _
total debt
_ x 100 (%)
(53%)
total debt + equity
This ratio gives us a clue that although ABC is not heavily reliant on long-term debt, it is reliant on
short-term debt. (Whole example on page 275/276).
Short-term liquidity
Current ratio = _ current assets _
current liabilities
(1,5 : 1)
Acid test or quick ratio = _current assets – inventory _
current liabilities
(0,7 : 1)
Cash flow ratio = _ average current liabilities _ (x 365 days)
(3264 days)
cash flow from operations
This confirms that ABC had liquidity problems as it tells us that if it continues to operate as it did in
2005 it would take 3264 days (9 years) to pay its current liabilities (those due to be paid within a
year!).
Returns to investors
Earnings per share = _
profit after interest and tax
_
number of ordinary shares in issue
Dividend cover = _ profit after interest and tax _
ordinary dividends
Interest cover = _ profit before interest and tax _
interest
Chapter 13: Internal users and internal information
PPT 1-2-3
Management information needs (financial)  for the purposes of planning, decision making
and control of organizations:
- More detailed information.
- Regular and up-to-date information (an annual report (specific time) is not enough).
- Frequent information  then they can monitor the results of their actions and decisions, and
fine tune the business as and when required.
- Decision-relevant information.
Nevertheless, managers do also use the annual report sometimes!
Some of the information is commercially sensitive and achievement of the goal of an enterprise may
be dependent on its plans being kept secret from its competitors. Thus, not all external users will be
able to demand access to the information and the question of whether they have access will depend
not only on who they are but also upon their importance to the enterprise.
Who are the external users who can have access to internal accounting information?
- Taxation authorities  statutory right.
- Enterprise’s bankers  often in sufficiently powerful position to demand and obtain further
information.
Information demanded by an enterprise’s bankers can be divided in two categories:
1. Required for routine monitoring  regular management accounts (monthly income
statements, analysis of debt in terms of how old they are, monthly trade payables balance,
and other up-to-date information);
2. Enabling judgements to be made about the future needs of the enterprise  info on future
prospects is normally required in the form of: projected cash flow statements, income
statements, other loans and their due dates (vervaldagen) for repayment.
There is a need in a large and complex business for a more formalized system, why?
1. Amount of information required in;
2. With larger businesses it is probably the case that the larger the business the more the senior
managers will be removed from the day-to-day operations.
 The size of the organization will influence the information needs of its managers and the way in
which these needs are met.
Different organizations have different structures  their information needs may also differ.
Chapter 2: Wealth and the measurement of profit
Income: that amount which an individual can consume and still be as well off at the end of the period
as he/she was at the start of the period.
 Income can be derived by measuring wealth at two different points in time and the difference
between the two figures is the income or profit.
An alternative view proposed by other economists suggests that if you first measure income then
you can derive (afleiden) wealth.
Wealth: a static measure and represents a stock at a particular point in time. This stock can change
over time. Hence, the wealth measured at the start of a period will not necessarily be equal to the
wealth measured at the end of the period. The difference between the two is the profit or loss for that
period of time.
Profit = wealth at start of the period – wealth at the end of the period
Unlike wealth, which is essentially a static measure, profit is a measure of flow that summarizes
activity over a period.
Profit period 1 = wealth 1 – wealth 0
Profit period 2 = wealth 2 – wealth 1
Original cost: the cost of the item at the time of the transaction between the buyer and seller.
 The cost is the cost to the individual or enterprise on which you are reporting.
Historic costs: the cost incurred (gemaakt) by the individual or enterprise in acquiring an item
measured at the time of the originating transaction.
 At the point of the original transaction.
One alternative to the original or historic cost of an item is its replacement cost.
Replacement cost (vervangingskosten): the amount that would have to be paid at today’s prices to
purchase an item similar to the existing item.
There are distinct problems in using either historic cost or replacement cost.
- Historic cost is unlikely to be useful when prices change, whatever the reason for that
change;
- Replacement cost is itself irrelevant if there is no intention of replacing the item with an
exact replica.
Economic value: The value of the expected earnings from using the item in question discounted at
an appropriate rate to give a present-day value.  It is, or would be, an ideal measure of value and
wealth. (Economische waarde = maatstaf voor de waarde van een actief, gebaseerd op de netto
contante waarde van de toekomstige kasstromen).
Problems of foreseeing technological change, fashion changes and suchlike make the estimation of
future earnings problematic.
Net realizable value (opbrengstwaarde): The amount that is likely to be obtained by selling an item,
less any costs incurred in selling.  It is an alternative measure of value to economic value.
Examples: second-hand car market, house market.
One of the most commonly cited problems with both replacement cost and net realizable value is that
they are subjective. That’s partially why accounts are still prepared using historic costs even though,
this can lead to irrelevant information being produced and wrong decisions being taken.
Change is likely to be slow in coming as the present system, based on historic cost, is familiar to all
and has, it is said, worked well in the past, although it is unclear what criteria are being used to back
up this claim.
Chapter 3: The measurement of wealth
PPT 4
Balance sheet: a statement, at one point in time, which shows all the items (assets) owned by the
enterprise and all the amounts owed by the enterprise (liabilities).
The business entity principle: business should be viewed as separate from the owner and
therefore accounted for separately.
 The future economic benefits must be received by the enterprise at some point in time.
For each business entity it is possible to account separately and therefore to draw up a balance sheet
at a point in time.
Purpose of balance sheet: communicate information about the financial position of an enterprise at a
particular point in time.
Liquidity: refers to the ease with which assets can be converted (omgezet) to cash in the normal
course of business.
Balance  list of what you own (wat je bezit) (» assets) and take away from what you owe (wat je
iemand verschuldigd bent)(» liabilities).
ASSETS  a resource controlled by an enterprise as a result of past events from which future
economic benefits are expected to flow to the entity.
Future economic benefit  The item must have some specific usefulness for the enterprise itself.
Current assets (vlottende activa)
Four criteria:
1. Expected to be realized, sold or used in the normal operating cycle;
2. Held primarily for the purpose of being traded;
3. Expected to be realized within twelve months after the balance sheet date;
4. It is cash or cash equivalent (gelijk).
Current asset: one which is either part of the operating cycle of the enterprise or is likely to be
realized in the form of cash within one year.
Non-current assets (vaste activa)
 Tangible assets  an asset that can be touched; has some physical attribute.
 Intangible assets  an asset that cannot be touched; has no physical form.
Non-current asset/fixed asset: asset that is required for the purposes of use within the business
and is likely to be used by the business for a considerable period of time.
 Essential elements are a considerable period and intention.  The ‘long-term’ earnings.
LIABILITIES  a present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow from the enterprise of resources embodying economic
benefit.  Liabilities are what the business owes.
Current liabilities
 Those liabilities falling due for payment with one year.
Examples: bank overdraft, goods are bought on credit terms and the supplier has not been paid at the
balance sheet date.
Other liabilities
Types of liabilities which do not have to be repaid in full in one year.
Examples: mortgage on a house, bank loan repayable in three or five years
Owners’ equity
 It is in one sense a claim on the assets of the enterprise. It is different from other liabilities in that
the amount cannot necessarily be determined accurately. It can be viewed as a residual claim on
the assets of the enterprise.
Balance sheet  statement of assets and liabilities at a particular point in time.
assets = liabilities
» It is headed with the name of the organization and the date to which the balance sheet relates.
Asset: a resource controlled by an enterprise as a result of past events from which future economic
benefits are expected to flow.
The principle of duality: basis of the double-entry bookkeeping system on which accounting is
based. It states that: every transaction has two opposite and equal sides.
Limitations of the balance sheet:
- It is only relevant at a specific point in time;
- It is an accurate measure of the assets and liabilities the values of those assets and liabilities
should be as up to date as possible.
Purposes of the balance sheet:
- How much cost each item?  Original, or historic, cost would be appropriate;
- How much could be sold each item?  Net realizable value may be appropriate.
The size and complexity and the scope of its operations must have an effect on the format of the
balance sheet and the amount of regulatory intervention.
BALANCE FORMAT
‘Balance sheet of … (company) as at … (date)….
 Non-current assets  all fixed assets
land, buildings, motor vehicles, machinery





Current assets
inventory of raw materials, inventory of finished goods, cash in hand
Current liabilities  amounts payable within a year
bank overdraft
Net current assets  subtracting the total of the current liabilities from the total of the
current assets
total assets less current liabilities
Non-current liabilities  amounts payable after more than one year
bank loan
Financed by  how are the assets financed by the owners’ capital
owners’ equity, retained profits (those that the business generated as a result of trading)
Chapter 4: The income statement and the cash flow statement
PPT 4
Income statement  relates to a period of time and its purpose is to measure profit (increase in
wealth).
REVENUE: the gross inflow of economic benefits during the period arising in the course of the
ordinary activities of the entity when those inflows result in increases in equity, other than increases
relating to contributions from equity participants. Not only cash sales but also the other sales for
which we have not been paid.
 Ontvangsten.
The realization principle: states that revenue should only be recognized
- when the earning process is substantially complete (verdiencapaciteit grotendeels voltooid).
- when the receipt of payment for the goods and service is reasonably certain (ontvangst vd.
betaling voor goederen/diensten is redelijk zeker).
The matching principle: we must match the revenue earned during a period with the expenses
incurred in earning that revenue.  If we include additional revenue then we must also include
expenses incurred in earning that additional revenue.
EXPENSE: is an expired (verlopen) cost, a cost from which all benefit has been extracted during an
accounting period.
Cost: a money sacrifice/ incurring of a liability in pursuit (in uitoefening) of the business objectives.
- Wages (lonen/salaris) involve normally a money sacrifice;
- Use of electricity  involve normally incurring a liability to pay at the end of a quarter;
- Purchase of machine  will normally incur a money sacrifice or a liability;
- Purchase of goods for resale  will normally incur a money sacrifice or a liability.
 Not all these examples are expenses. (Machinery is likely to last more than one period and so it
cannot be seen as an expired cost).
Only costs relating to the business objectives can ever become expenses.
Three situations in which we have to decide whether a cost which is clearly a business cost is an
expense of the period:
1. Costs of this year are expenses of this year  occurs when an item or service is acquired
during a year and consumed during that same year. (Note that no reference is made to
whether the item acquired has been paid for.)
2. Costs of earlier years are expenses of this year
* Wholly expenses of this year Example: stock of goods in a shop at the end of the year,
they are assets at the year end (benefit has not expired). In the next year they will be sold
and thus will become expenses of the next year.
* Partly expenses of current year  Example: any consumer durable (car, washing
machine, television) » costs are incurred at a point in time but the benefits are expected to
accrue over a number of years. (Fixed assets).
3. Costs of this year are expenses of subsequent years  Examples: car tax, insurance and
rates. The due date (vervaldatum) for payment of these is unlikely to coincide (samenvallen)
with the end of the accounting period.
INCOME STATEMENT
Purpose: measure the profit or loss for the period  by summarizing the revenues for the period,
matching the expenses incurred in earning those revenues and subtracting the expenses from the
revenues to arrive at the profit or loss.
 revenue – expenses = profit
 assets at T0 – liabilities at T0 = owners’ equity at T0
 assets at T1 – liabilities at T1 = owners’ equity at T0 + profit P1 (revenue-expenses)
Gross profit: sales less cost of goods sold.
Net profit: gross profit less operating costs, administrative costs and other charges.
The users of accounts often have different requirements from each other.
Smaller entities  a more detailed version, or two versions (detailed one and summarized one).
CASH FLOW STATEMENT
 Concerned with the flow of money in to and out of the business entity over time (a period).
What money has come in and what has gone out.
It measures changes in the stock of wealth over time (exchanging cash for the van and also potential
increases in wealth).
 Assets give future benefit;
 Expenses relate to benefits used up in the accounting period.
Chapter 5: Introduction to the worksheet
PPT 4
 balance sheet equation: assets = liabilities + owners’ equity (+ (revenue-expenses))
 profit = revenue – expenses
The principle of duality: basis of the double-entry bookkeeping system on which accounting is
based. It states that: every transaction has two opposite and equal sides.
Application of the principle of duality: applying the duality principle to our equation we find that,
if we increase our assets, we must have:
- either increased our liabilities
- or made a profit
- or increased our owners’ equity
- or decreased another asset.
In other words, the principle of duality when applied to the balance sheet equation holds that both
sides of the equation must always be equal.
WORKSHEET
- identifying and describing of transaction (sometimes only an item number)
- for each purchased asset a column
- liabilities
- owner’s equity
- control-column (assets minus owner’s equity minus liabilities  the outcome should be zero)
Different kinds of mistakes you can make:



Single-entry error  you use only one side of the transaction (when we paid the wages we
simply deducted the £500 from the cash column).
Incorrect double entry  two sides are recorded but they do not leave the equation in
balance (we had incorrect classified the £5000 that Beetle obtained from selling the goods as an
increase in cash and an increase in finished goods rather than as sales revenue).
Addition, subtraction and transposition errors  Fail to add or subtract (optellen &
aftrekken) correctly and typing mistakes.
Chapter 6: Inventory
Inventory = current asset
INVENTORY comprises assets:
1. held for sale in the ordinary course of business;
2. in the process of production; or
3. in the form of materials or supplies to be consumed in the production process or the
rendering of services.


Goods purchased for resale
Raw materials purchased for incorporation into the product or products being manufactured or
assembled for sale
 Consumable goods, which are bought not for resale but for use within the business operation
 Goods in the process of production for sale (Work In Progress)
 Goods that have been through the production process and are awaiting sale
The distinguishing feature of inventory is the intention to resell the item in some form or to use it in a
relatively short period of time.
Work in progress (WIP): term applied to products and services that are at an intermediate stage of
completion (for example: partially completed buildings which are work in progress for some building
contractor).
Finished goods: goods that have been through the complete production or assembly cycle and are
ready for resale to the customer.
The way in which the nature of the business affects the question of inventory valuation
(voorraadwaardering).
For retailing business, little if any change between the goods (bought and sells):
Purchases (input)  Inventory  Sales (output)
For manufacturing company:
 cost of goods sold = (opening inventory + purchases) – closing inventory
Importance of determining inventory levels: because the cost of goods sold is, in some cases,
calculated by combining the purchases with the inventory figures, the opening and closing inventory
levels are vital in determining the cost of goods sold. They therefore have a dual (dubbele) role in the
balance sheet in determining wealth and, through the cost of goods sold, in determining profit.
Net cash flow and net profit aren’t the same, this is because for example the goods purchased (£12
000) are not all sold. The cash outflow is £10 000.
Inventory goes up  cash is used to buy that inventory  cash decreases.
Inventory goes down  some of the goods sold during the period were bought in a previous period
 cash flow would have taken place in the previous period.
 net profit = operating cash flow (+ or -) change in inventory
Operating cash flow: cash inflows and cash outflows arising (voortvloeien) from the trading
activities of the enterprise.
Valuation of inventory
Changes in technology and taste
 Net realizable value: defined as the estimated proceeds from the sale of items less the costs
of selling these items (de geschatte opbrenst vd verkoop van items is kleiner dan de kosten vd
verkoop van deze items).
 Inventory Sales Value - Estimated Cost of Completion and Disposal = Net Realizable
Value (verkoop waarde – geschatte kosten vd aanvullen en verwijdering = NRV)
 The valuation rule: inventory should be valued at the lower of cost and net realizable value
 we should compare the cost of an item with what we can get for it and, if the latter figure
is lower, use that figure to value our inventory!
 The prudence (voorzichtigheid/omzichtigheid) concept: profits are not anticipated
(verwacht)and revenue is not recognized until its realization is reasonably certain. Provision
(voorzorg) is made for all potential losses.
Establishing (vaststelling) the cost of inventory
Cost shall comprise : all costs of purchase, cost of conversion (direct costs (labour/materials),
production overheads (foreman’s wages), any other overheads) and other costs incurred in bringing
inventories to their present location or condition.
The assembly process of a bicycle.
Process: raw materials  WIP  finished goods  sales.
Different methods of valuation:
 FIFO – first in, first out
 LIFO – last in, first out
 Average cost  compromise between FIFO and LIFO, it is needed to work out the average
cost per unit of inventory and multiply that by the number of units sold.
 The International Accounting Standard on Inventory states that cost can be arrived at using either
FIFO or weighted average cost but doest not allow LIFO to be used.
Chapter 7: Amounts receivable and amounts payable
Trade receivables and prepayments
Trade receivables (handelsvorderingen): money owed to the business for the supply of goods or
services, trade receivables areise when a business sells goods or services to a third party on credit
term, thus on the understanding that payment will be received at a later date.
We need to recognize the revenue from the sales even though the cash has not yet been received. In
this case we cannot use the cash account on the balance sheet if no cash has been received. Solution:
open a new column (account) for this asset  ‘trade receivables’ = current asset.
Prepayments: payments in advance (vooruitbetalingen)  insurance/road tax.
Prepayments differ from other receivables in that they relate to payments made by the business
rather than to revenue earned from sales.
The key question that must be considered is whether the benefit has been used up or whether there
is still some future to be obtained. If there is a future benefit accruing (toekomende) to the business,
we have an asset; if there is no future benefit, we haven an expense, which must be matched with
revenue.
Bad debts (debiteuren)
Situation: we come to the end of the quartile and review the balances, we find that some of the
amounts owed by customers are not likely to be collected.
On the worksheet as: Bad debt: -200 in the column ‘Trade receivables’ and -200 in the column
‘Revenue and expenses’.
Trade payables and accruals (handelsschulden en te betalen kosten)
Trade and other payables: arise when goods or services are supplied to an enterprise for which an
invoice (factuur) is subsequently received and for which no payment has been made at the date of
receipt of the goods or services. » Iets gekocht, factuur al binnen, nog niet betaald.
 Payables are amounts owing at a point in time, the amounts of which are known.
Accruals: in some way similar to payables in that they relate to amounts due for goods or services
already supplied to the enterprise, they differ because at the time of drawing up a balance sheet, the
amounts involved are not known with certainty.
 Accruals are amounts owing at a point in time, the amounts of which are not known with
certainty. » For example: telephone bills, electricity bills, gas bills.
Net cash flow and net profit aren’t the same this is because for example:
- the goods purchased (£12 000) are not all sold. The cash outflow is £10 000.
-
the cash flow statement contains items that bear no relationship to revenue and expenses
(injection of the owners equity and the loan)
changes in inventory level (chapter 6)
changes in level of payables, prepayments and accruals
Calculation of cost of sales
 opening inventory + purchases – closing inventory = cost of goods sold
NOTE:
- what appears as a prepayment at the end of one period will cease (stoppen) to be an asset
and will become an expense in the next period;
- amounts shown as accruals at the end of one period will be paid in the next period and cease
to be liabilities;
- think at the end of each accounting period about whether there are any prepayments made
or accruals to be set up for services or goods received for which no invoice has been received
by the end of the accounting period.
Chapter 8: Non-current assets, fixed assets and depreciation
Non-current asset = vaste activa
ASSETS  a resource controlled by an enterprise as a result of past events from which future
economic benefits are expected to flow to the entity.
Current asset (vlottende activa): one which is either part of the operating cycle of the enterprise or
is likely to be realized in the form of cash within one year.
Fixed asset (vaste activa): is acquired for the purposes of use within a business and is likely to be
used by the business for a considerable period of time (more than one year).
Income: that amount which an individual can consume and still be as well off at the end of the period
as he or she was at the start of the period.
For the non-current assets the future benefits are much more difficult to arrive at.
Difference between current and non-current assets
- intention (car for sales representative (non-current) or car for a car dealer (current)?)
- nature » intention change due to a change of nature of business
Current  bezittingen die minder dan 1 jaar binnen de organisatie aanwezig zijn.
Non-current  bezittingen die langer dan 1 jaar binnen de organisatie aanwezig zijn.
Cost of a non-current asset  sometimes difficult to measure, examples are:
 Asset created by the business (process/new product which is subject to a patent)
 Asset bought by the business where we know more precisely what the total cost is, but even
here deciding on the cost is not as simple as might appear (individual builds a house.
Materiality: broadly, an item can be said to be material if its non-disclosure (niet openbaar) would
lead to the accounts being misleading in some way.
Guidelines which accountants use regard to the cost of a non-current asset  see the examples on page
164-165.
Has there been an enhancement (verbetering) of the potential future benefits? If there has, then the
cost should be added to the asset. If, however, the effect is simply to restore the status quo, as in the
case with car repairs, then it is more reasonable to treat those costs as expenses of the period in
which they arise.
How do we judge the useful life?
 all we can hope for is an approximation of the useful life (uncertainty in respect of the future).
How do we spread the cost over the useful life?
 Done by means of depreciation.
Depreciation (amortization)= afschrijving: the systematic allocation of the depreciable amount of
an asset over its useful life.
Depreciable amount: the cost of an asset, or other amount substituted for cost, less its residual
value.
Why depreciate?
 to match the revenue earned in a period with the expense connected with earning that
revenue
 to maintain the capacity of a business to continue its production
 Effect of charging deprecation in the income statement was to reduce the net profit  this led to
a reduction in the amount available to be withdrawn each year.
 Fixed assets reduce each year by the amount of the depreciation charge.
See the examples on page 170-171.
Carrying amount: the amount at which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses.
Methods of depreciation (residual value is the same as scrap value = restwaarde)
 The straight-line method  the asset usage is equal for all periods of its useful life.
Formula: _ cost – residual value _
useful life
 Reducing balance method  the asset declines more in the earlier years of the asset life
than in the later years (cost of repairs increase as the asset becomes older).
Formula:
rate of depreciation =
Depreciation has no effect on the cash flow statement  the money doesn’t flow really out of the
business.
Chapter 9: Financing and business structures
Business risk: applies equally to all firms in an industry, with some variations realting to seize and
diversity  it is industry specific rather than firm specific.
Financial risk: more firm specific; it relates to the financial structure of a business (the way in which
it finances its assets).
Type of finance: the finance used and the period of that finance should be matched to the period for
which it is required and the purpose for which it is to be used.
Different sources of finance
 Short-term finance  finance for a period less than a year.
Trade credit: a form of short-term finance, it has few costs and security is not required.
Normally a supplier will allow business customers a period of time after goods have been
delivered before payment is required.
Trade credit  normally used to (partially) finance receivables and inventory.
Costs of trade credit:
» often thought of as cost-free credit, is not strictly true.
- often supplier allow a small discount for early payment, therefore, taking the full period to
pay has an opportunity cost in the form of the discount foregone. (p. 187)
Factoring: provides short-term finance. Costs include an interest charge (kosten) and a debt
management charge. The finance is secured on the receivables.
If a business makes sales on credit, it will have to collect payment from its customers at a
particular point in time. In order to release (vrijmaken) the money tied up in receivables,
the business can approach a factoring company  finance companies which specialize in
providing a service for the collection of payments from customers.
» This form is more expensive than trade credit but can be useful (business can concentrate
only on production, sales and improve the cash flow).
Costs of factoring for a company:
- form of interest based on the finance provided
- fee for managing the collection of the debts
Bank overdraft: provide finance only when it is needed. Costs included interest and often
a set-up charge. In general, some form of security will be required (depends on size of business
 charge on the assets, property, owner’s homes, personal guarantees from the owner).
Banks provide short-term finance for working capital, either in the form of short-term loans
(fixed period of time, interest is charged) or in the form of an overdraft (facility that can be used
as and when required and interest is only charged when it is used).
Costs of a bank overdraft:
- charge in the form of interest
- fee for setting up the facility
 Medium-term finance
Loans: are generally for a fixed purpose and a fixed period. They have set repayment dates
(aflossing data), and costs include interest and set-up fees. They are normally secured on assets.
Ideally the fixed period should relate to the life of the asset.
Costs of loans:
- interest (rates are dependent of the size of the business and the lender’s assessment
(schatting) of the risk involved).
Hire purchase (koop in termijnen/huurkoop): is for a fixed period. Costs are in the form of
interest charges. Ownership of the asset remains (blijft) with the provider (verstrekker) of the
finance until all instalments (termijnen) are paid.
The finance is for a specified asset purchase  the amount borrowed is limited by the price of
the asset.
Costs of hire purchase:
- interest charges
Leasing: leases are for a fixed period. The costs are in the form of interest charges. Security is
related to the asset in question.
 Agreement between the person who owns the asset (lessor) and the person who uses the
asset (lessee). It conveys the right to use that asset for a stated period of time in exchange for
payment but does not normally transfer ownership at the end of the lease period.
Costs of leasing:
- interest charges
Types of lease:
- Operating lease  a lease where the underlying substance of the transaction is a rental
arrangement; renting the equipment. (Full amount of the payments made is charged as an
expense in the income statement).
- Finance lease  a lease where the underlying substance of the transaction is a financing
arrangement; borrowing money from a finance company and then using that money to buy
an asset. (Loan preceded the purchase, the income statement is only charged with the
interest).
 Long-term finance
Debt finance  long-term debt finance is generally for a fixed period and interest rates can
be higher than for short- or medium-term finance.
- Long-term loans  available to all organizations.
Are often for a specific purpose and the period is affected by the life of the asset, the
repayments required and the willingness of the lender to lend the money.
- Debentures and loan stock (obligaties)  available by incorporated businesses.
Interest » at fixed rate.
Repayment » at fixed point in time.
Debentures and loan stock are issued (uitgegeven) by the company raising the finance and
can usually be traded on secondary markets.
Equity finance (financiering vh eigen vermogen)  a long-term permanent finance and comes
from two main sources: contributed capital & retained earnings (ingehouden winsten).
- Sole proprietorships or owner-managed businesses » eenmanszaken.
Sources of equity finance: money contributed by the owner and retained earnings.
One person responsible for the debts.
- Partnerships » vennootschap onder firma (VOF)
Sources of equity finance: money contributed by the owners and retained earnings.
Here more people involved, so more equity can be raised through contributions by the
owners.
The partners are jointly and severally liable (aansprakelijk).
- Limited companies
Sources of equity finance: money contributed by the owners through the issue of ordinary
shares and retained earnings.
Liability of the owners is limited to the amount they have invested in the company.
- Ordinary shares » gewone aandelen
Represent contributed capital, and reserves, which represent profits made by the company.
Each share normally has a nominal or par value.
Sources of equity finance: Difference between the nominal value and the price at which the
share is issued is put to a special amount known as the share premium account (= source of
equity finance and as with any other form of organization, retained earnings.
A company distributes its profits by way of dividends.
Most shareholders play virtually no part in the management of the company, they merely
invest their money and take the risk that they will get better returns (in form of their share
of the profits).
- Preference shares » preferente aandelen
A preference share normally has a fixed divided and, even if more profits are made, the
preference dividend remains the same. They normally carry a right to preference in the
order of payment in the event of the company going into liquidation.  Less risky.
Financing structures and financial risk
The more reliant (afhankelijk) a business is on debt finance (more highly geared), the greater is the
risk.
Risk: interest rates go up (or profit margin comes down)  enterprise wouldn’t be able to pay the
interest or repayments due on its debt finance.
Earnings per share: _
profit
number of shares in issue
_
See example on page 198/199  if you have the same sales, costs and net profit, the shares of two
companies can differ. The difference can arise as a result of the financing structure, its effect on the
interest charges and the remaining profit after interest.
Effects of high gearing :
- increase the returns to shareholders, but at the same time:
- make the returns more vulnerable to decreases in profit margin.
Their returns are also affected more by increases in interest rates than those of a low-geared
company.
The lower the share of the business that is financed by equity, the more difficult it is to raise debt
finance.
Chapter 10: Cash flow statements
Balance sheet & income statement  accrual accounting (boekhouding op transactiebasis)
Cash flow statement  actual cash flows.
In order for a business to be successful it needs two things:
1. profitable in the long run  income statement helps;
2. able to pay its debts as they fall due (opeisbaar)  cash flow statement.
Types of cash flows
Cash inflows  increases in cash:
- monies (gelden) generated from trading (» cash flows from operations);
- monies from new share issues or other forms of long-term finance;
- monies received from the sale (disposal = verkoop) of fixed assets.
Cash outflows  decreases in cash:
- monies used to buy new fixed assets;
- monies used to pay tax and dividends;
- monies used to repay debenture holders or other providers of long-term capital.
Net cash flows: consist of the net effect of cash inflows and cash outflows.
Divide the cash flows into the business and out of the business under a number of separate headings:
Net cash from operating activities – Investing activities – Financing activities.
First subheading: Net cash from operating activities
The principal revenue-producing activities of the entity and other activities that are not investing or
financing activities. Include the production, sales and delivery of the company’s product as well as
collecting payment from its customers. This could include purchasing raw materials, building
inventory, advertising, and shipping the product.  RECURRENT in the short run!!
 See document 2 for the whole overview of activities.
To find the cash from operations… (wel belangrijk om te weten!)
profit – increase in level of inventory  net cash from operations
profit + decrease in level of inventory  net cash from operations
profit – increase in level of receivables and prepayments  net cash from operations
profit + decrease in level of receivables and prepayments  net cash from operations
profit + increase in level of payables and accruals  net cash from operations
profit – decrease in level of payables and accruals  net cahs from operations
Depreciation and profits and losses on sales of fixed assets
profit + charge for depreciation for the year  net cash from operations
profit - profit on the sale of fixed assets  net cash from operations
loss on the sale of fixed assets + profit  net cash from operations
For example:
Inflow: sales, sales-credit
//
Outflow: cash paid for purchases, rent, wages.
Second subheading: Investing activities
 investment in non-current assets and sales of that category of assets. Payments to invest, to
acquire fixed assets. Receipts from disposal of fixed assets.
For example:
- payments to acquire fixed (non-current) assets
- payments to acquire investments
- receipts from disposal of fixed assets
 all payments and receipts in respect of the acquisition and disposal of non-current assets.
Third subheading: Financing activities
 moneys raised by issuing shares, debentures, loans, etc., and money used to redeem (aflossen)
shares or debentures or pay back long-term debt. Issue of ordinary share capital/ share repurchase.
(Repayment of a) long term loan.
For example:
- repayment of loan
- receipt from issue or ordinary share capital
- payments of dividends
- sale or repurchase of the company’s stock
- net borrowings
- payment of dividend tax
 anything relating to the long-term financing of the business.
Producing a cash flow statement from the worksheet » Example 10.2.
Kijken naar de bank/cash kolom, alleen meenemen behalve (in dit geval) lening en plant (= onroerend
goed). Dit is samen de cash flow from operating activities. Bij investing activities hoort dan acquisition
of plant. En bij financing activities hoort de long-term loan.
Producing a cash flow statement from the income statement/ balance sheet » Example 10.2
Cash flow from operations
We need net profit and all those items not involving cash flows (in this case depreciation). These noncash flow items need to be added to the profit to get to a figure representing the cash flows. 
Income statement.
Identify any amounts included in the figures used in arriving at the profit for which a cash flow has
NOT yet been taken place (sales on credit where the cash has not yet been received  increase in
receivables, increase in inventory, increase in payables.
Voeg een extra kolom ‘Change’ toe in de balans. Hierin het verschil van de twee jaren. Hierin kun je
bijvoorbeeld zien:
- increase in plant of £3000
- increase in inventory of £2000
- increase in trade receivables of £14000
- decrease of £2000 each in tax and dividends payable
Cash flow form operating activities:
Net loss + depreciation + increase in payables – increase in inventory – increase in receivables = net
cash flow from operating activities.
The other two items (for investing activities and financing activities) are easier and these you can
verify of the balance.
SEE EXAMPLE 10.2 ON PAGE 209-216!!
Chapter 11: Final accounts and company accounts
Traditional approach  accounts are represented by T accounts (using ‘debits’ and ‘credits’).
There is almost no difference between the two methods.
Debits and credits: under the traditional approach assets are shown as debit balances and liabilities
are shown as credit balances.
Left: debit  assets.
Right: credit  liabilities.
End of period adjustments  refer to adjustments (aanpassingen) such as those required to provide
for depreciation, bad debts, accruals and prepayments, etc.
Forms of organization  each of the different organizational forms requires slightly different
accounts.
 Sole proprietorship: one-owner business. Required is a business bank account, there are no
formal guidelines for the format of the accounts.
 Limited companies: a separate legal entity quite distinct from its owners. In case of debt the
company is responsible, not the owners. A company’s accounts should consist of (in UK):
- balance sheet
- income statement
- directors’ report
- auditors’ report
Chapter 21: Management of working capital
Working capital: is the difference between current assets and current liabilities, measured in
monetary terms. If the difference is positive (when current assets exceed current liabilities), working
capital is said to be ‘positive’.
Negative working capital means that short-term sources of finance are also financing non-current
assets which may be seen as important.
Liquidity: refers to the ability of the business to meet debts when they fall due, which is clearly
critical if it is to survive.
The importance of management of working capital
The need to manage current assets
It is the portion of current assets that is financed by the business that is categorized as working
capital. (The other portions are for example financed by trade payables and banks).
Importance of management of working capital:
- a certain security for shareholders who expect a return;
- a certain security for suppliers who have given credit;
- a certain security for banks who have support it with charge for the facility;
- ensure that the current assets are sufficient to support the day-to-day operations of the
business.
It is to the firm’s advantage to keep this investment in working capital to a minimum but at the same
time invest sufficiently in current assets to be able to carry out day-to-day trading activities efficiently.
(Same case is with inventory, not too much, but also not too little.)
The cost of investing in working capital
 direct costs (= cost of the capital invested in working capital) + opportunity costs (= the maxim
benefit which could be obtained from that resource if it were used for some alternative purposes, if a
firm uses a resource for alternative A rather than B, it is the potential benefits that are forgone by not
using the resource for alternative B that constitute the opportunity cost; in this case the opportunity
costs is represented by the returns forgone by investing in current assets rather than in some
alternative investment opportunity).
Financing working capital and the type of business
Businesses need to plan and determine their working capital needs. These plans will normally and
wisely be translated into the business budget.
Liquidity  in terms of this, the management of working capital is critical.
Businesses must ensure they have enough liquid resources to meet any demands upon them.
 Overtrading: describes the situation where a business has expanded its turnover to a level not
supported by its investment in working capital. For example, if a business starts to expand quickly
and has to invest heavily in current assets to support this expansion, they may find themselves
overstretching their cash resources.
External users  should also know about the company’s management of working capital and in
particular their liquidity.
The working capital cycle
Is the period of time from the investment into current assets to the inflow of cash derived from the
investment. (Measured in terms of days).  Utilized to determine the time from any investment
outlay or investment in current assets to the inflow of cash derived from the investment.
See figure 21.1 on page 458!
The working capital cycle in days can be calculated based upon turnover ratios:
RAW MATERIALS TURNOVER (number of days inventory of supplies held by the company)
_ raw materials _ × 365 days
76
purchase on credit
Less: PAYABLES TURNOVER (credit from suppliers)
_
payables
_ _ × 365 days
purchases on credit
61
15
Plus: PRODUCTION PERIOD (WIP turnover)
_ work in progress _ × 365 days
cost of goods sold
Plus: FINISHED GOODS INVENTORY
_ finished goods _ × 365 days
cost of goods sold
Plus: CREDIT TAKEN BY CUSTOMERS (receivables turnover)
_ account receivable _ × 365 days
sales
37
42
73
167
Possible ways of decreasing the working capital cycle:
 Reduce the time given to customers to pay their debts;
 Reduce the inventory of raw materials and finished goods;
 Delay (uitstel) payments to suppliers.
Trade credit
 one of the most important sources of short-term finance for most businesses and is characterized
by one business entity extending credit to another on the purchase of goods or services.
Trade payables » is free, there are no explicit costs (not the case with any other sources of finance,
such as bank loans).
Measuring the level of trade credit
Payables turnover ratio: _ trade payables _ × 365 days
credit purchases
 it computes the time taken by the business to pay suppliers (measured in days).
Trade receivables
 giving credit to customers.
In deciding a policy for determining the optimum level of receivables the following should be taken
into account:
- Trade-off between:
* extending credit in order to increase the volume of sales and profits
* opportunity costs, administrative costs and potential increase in bad debts
- Level of risk
- Investment in debt collection management
Receivables turnover ratio: _ trade receivables _ × 365 days
credit sales
 this measures the average debt collection period.
Inventory (‘stock’ in the UK)
Categories of inventory
Manufacturing businesses:
- raw materials
- work in progress (WIP)
- finished goods
Retail businesses:
- resale
Service industries:
- work in progress
Terms and definitions
- Stock-outs: arise when there is a requirement for an item of inventory, but none is available
at that particular time.
- Lead time: time which elapses between the placing of an order for inventory and delivery.
- Buffer stock / inventory: level of inventory held in case of unexpectedly high demand
and/or the inventory required to meet demand during the lead time.
- The order of quantity: number of units of an item in order.
- The reorder quantity: the balance of units remaining in inventory at which will be triggered
an order for additional inventory.
Reasons for businesses holding inventory
 it acts as a buffer for unusual high demand;
 take advantages of quantity discounts by buying in bulk;
 any delay in production caused by a lack of materials or parts is kept to a minimum;
 not necessary for a business to purchase inventory at a higher price than may otherwise have
been necessary simply because it needs to replenish inventory quickly;
 loss of customer goodwill from not being able to meet demand;
 take advantage of seasonal and other price fluctuations.
Inventory costs
 Costs of the inventory itself (raw materials, direct labour, indirect costs  supervisor’s
wages).
 Holding costs (capital tied up in inventory (opportunity cost), warehousing, handling costs,
deterioration (verslechtering/achteruitgang) costs, insurance).
 Ordering costs (costs of raising orders, delivery costs).
 Stock-out costs (loss of sales, loss of customers’ goodwill, cost of lost production, extra cost of
having to replenish (voorraad bijvullen) inventory quickly.
Inventory control
Control of inventory levels is often achieved by collecting for each inventory item (details of the
amounts used in an average period » average, an exceptionally busy period » maximum, and
exceptionally slack period » minimum.
 reorder level = maximum delivery period × maximum usage
Economic order quantity
The economic order quantity (EOQ) or the economic batch quantity (EBQ), is the order quantity
for an item of inventory which minimizes costs.
Number of assumptions underpinning the basic EOQ model:
- demand for inventory is certain, constant and continuous over time;
- supply lead time is constant and certain;
- no stock-outs are permitted;
- all prices are constant and certain;
- no bulk purchases discounts;
- cost of holding inventory is proportional to the quantity of inventory held.
 See page 470/471!
Notation:
D = usage in units
C = cost of placing an order
H = holding costs
Q = reorder quantity, this is
the economic order quantity
that minimizes costs.
Average inventory = Q/2
Cost of holding the average inventory for 1 time period = (Q/2) × H
Number of orders made in a time period = D/Q
Total ordering costs for the time period = (C × D)/Q
Total cost per time period T = (Q/2) × C + ((C × D)/Q)
 objective is to minimize T.
Determining EOQ: Q =
Ordering costs per period will equal inventory holding costs:
Note: for example, 40p means 0.4!!
See example 21.5 on page 471!
Just in time (JIT)
 Aim: have zero inventories.
 Tends to be relatively fewer suppliers; this reduces costs.
‘A technique for the organization of work flows, to allow rapid, high-quality, flexible production
whilst minimizing manufacturing waste and inventory levels’.
Cash management
Emphasis that a business entity places on cash is dependent on a number of factors:
- industrial sector (retail businesses, manufacturing industries)
- size of the business
Cash management is more critical in small than in large businesses  small businesses have
generally a higher level of business and financial risk compared with their larger counterparts
(tegenpartijen)  small businesses are more vulnerable to insolvency.
Reasons for holding cash
 Transaction motive  to be able to meet payments when they fall due (vervallen).
 Precautionary (voorzorgsmaatregelen) motive  cash should be kept in order to meet any
unexpected outgoings.
 Speculative motive  cash should be kept to take advantage of any unexpected beneficial
opportunity.
The cost of holding cash » opportunity cost.
 profit foregone by not employing the cash elsewhere, for example the return from investing the
money in short-term investments or in less liquid assets, such as new equipment.
Cash and cash equivalents
‘Cash’  receipts and payments for goods and services, and includes cash equivalents such as
payments and receipts from credit cards and cheques.
Additional opportunity cost: cost relates to the time it takes administratively to recognize the
payment or receipt. For example, for cheques paid outside the city of London, a minimum of three
working days is needed for clearance.
Security, in term of cash management, is an important issue and should therefore be an important
consideration in deciding on the means of payment that is acceptable.
The frequency of banking cash – the decision
 see example 21.7 on page 475.
Cash budget and cash levels
How much cash should be held purely in liquid form and how much should be invested in short-term
securities?  You have to balance the several factors.
Ratio which is useful in assisting management in this decision relating to cash balances is the ratio of
cash balances to the level of current assets:
 gives a rough guide to the level of cash balances that a firm should hold.