In: Finance
Question 14.2 Briefly define the following cash flow estimation concepts: changes in current Accounts
Changes in current account impacts the cash flow estimation.
Cash flow is the amount of cash and cash-equivalents that is coming in and going out of the company. Positive cash flow indicates that company has enough cash to repay it's debt, can do reinvestment, distribute dividends etc. Whereas, negative cash flow indicates that company spends too much on capital expenditures and it's operating expenses is not generating enough cash to repay it's debt.
Current accounts are the accounts that are for short duration, generally for less than one year like accounts receivables , accounts payable, inventories, marketable securities etc. that can be easily convertible into cash in short duration. They are generally shown as current assets and current liabilities on the balance sheet.
Following changes in the current account impacts the cash flow:
1) Accounts payable are a great source of cash. Making arrangements with suppliers can increase company's cash on hand.
2) Accounts receivables are recorded on the current assets of the balance sheet but have a great impact on cash flow. If a company reduce it's account receivable it will increase the cash flow.
3) Cash conversion cycle means a time that is required by a company to convert it's investment in inventory into cash flows.