Accounting concept question! Negative cash flow?
- Thread starter luvya
- Start date
WAIT A SEC!! YOU'RE THE ONE WHO POSTED IT!!
http://forums.anandtech.com/messageview.cfm?catid=38&threadid=1272363&FTVAR_MSGDBTABLE=
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Originally posted by: luvya
Well, the midnight crew did a poor job of explaining. So I am asking the morning crew now
you couldda just bumped your thread?!
Widgets, Inc. is a small manufacturing company that makes and sells Widgets.
Mega corp orders 10,000 widgets.
Widgets, Inc. must buy raw materials for 10,000 widgets but doesn't get money until they deliver finished widgets.
Negative cash flow. More money going out (to buy raw materials) than is coming in (because they haven't received payment from Mega yet.)
Negative cash flow is a big problem for rapidly growing companies.
Mega corp orders 10,000 widgets.
Widgets, Inc. must buy raw materials for 10,000 widgets but doesn't get money until they deliver finished widgets.
Negative cash flow. More money going out (to buy raw materials) than is coming in (because they haven't received payment from Mega yet.)
Negative cash flow is a big problem for rapidly growing companies.
Unfortunately, not what I am asking though. How do you spend $100 in cash when u only have $50? Borrowing money is already reflected on cash flow statement as cash inflow....unless I am totally wrong here.
Extremely simplified example:
Your company sold 30,000 worth of goods on credit this as of 12/31/200X. None of this was collected. So your company's accounts receivable increases by 30,000, and you recognize the 30,000 as revenue for the year under the accrual method. This means that your don't have any cash inflow.
Now, your company has also incurred expenses of 20,000, which has all been paid off immediately in cash. So now your company has a 20,000 outflow.
Position income, negative cash flow.
dfi
Your company sold 30,000 worth of goods on credit this as of 12/31/200X. None of this was collected. So your company's accounts receivable increases by 30,000, and you recognize the 30,000 as revenue for the year under the accrual method. This means that your don't have any cash inflow.
Now, your company has also incurred expenses of 20,000, which has all been paid off immediately in cash. So now your company has a 20,000 outflow.
Position income, negative cash flow.
dfi
dullard
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- May 21, 2001
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Your views on cash flow are completely different from what I learned in my economics classes. I was always taught a definition like this. I was always taught an example like this would be negative cash flow:
$100 in bank. You spend $50 of that during a period of time, you get $25 in income during that period of time. Net -$25 cash flow during that period of time.
Of course if you are talking accounting, then things are a different story: - ($50 spend) + ($50 worth of goods/services received) + ($25 income) - ($25 goods/services sold) = $0. So in accounting everything always balances out to $0. This accounting view is a broad definition: including cash, goods, etc. But if you ONLY look at the cash part, then it doesn't always add to $0.
$100 in bank. You spend $50 of that during a period of time, you get $25 in income during that period of time. Net -$25 cash flow during that period of time.
Of course if you are talking accounting, then things are a different story: - ($50 spend) + ($50 worth of goods/services received) + ($25 income) - ($25 goods/services sold) = $0. So in accounting everything always balances out to $0. This accounting view is a broad definition: including cash, goods, etc. But if you ONLY look at the cash part, then it doesn't always add to $0.
Ok I'm too lazy to flip open a book, but I think this is right.
Look carefully at the statement of cash flow. You start with net income, then you move on to cash from operating activities. That's reversing the effect of accounts such as A/R and A/P so you can reach your net cash flow.
So if you have $50 in the cash account, and $100 increase this year in A/P, that doesn't have any effect on net cash flow. Yes, effectively you've spent more money than you have, and this will be reflected in your income statement.
Just like A/R. If you have an increase in A/R of $300, and $50 in the cash account, that doesn't affect your net cash flow either. The sale will be recognized in your income statement.
dfi
a company's cash flow statement for a given year incorporates the changes in various accounts related to cash, not the actual amounts. so, it's not like the actual cash account in a company needs to be negative in order for the company to have a negative cash flow for the year.
cash flow is the flow of cash onto and off the balance sheet, right.
there are three types
CFO - Operating CF - the business operation is making or losing cash
CFF - Financing CF - the firm is buying or selling shares and debt
CFI - Investing CF - the firm is buying or selling fixed assets
negative cf is normally negative op cf (CFO), so literally its selling things at a loss.
obviously the excess cash has to be replaced by reserves, or by running inventories down or increasing payables.
there are three types
CFO - Operating CF - the business operation is making or losing cash
CFF - Financing CF - the firm is buying or selling shares and debt
CFI - Investing CF - the firm is buying or selling fixed assets
negative cf is normally negative op cf (CFO), so literally its selling things at a loss.
obviously the excess cash has to be replaced by reserves, or by running inventories down or increasing payables.
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