Introduction to Accounting and finance -- Economics, Finance and Assignment - 1

Introduction to Accounting and finance -- Economics, Finance and Management - Assignment Example The expenses of the company increases and company may not have enough cash available to meet its expenses. Therefore, the cash deficit is met by bank overdraft which affects company’s liquidity position. Company should not make all the sales and purchases on credit. It should choose a fair combination of cash and credit sales/purchases so that, company’s receivables and payables don’t reach peak levels. It is probably not possible to collect the total amount of credit sales. Some amount of credit sales turns into bad debt expense which can’t be recovered. Company should allocate small percentage of sales to bad debts. Cash is what keeps the business functioning. Company requires cash on hand to pay for its operating, investing and financing expenses. The amount of cash available/deficit is calculated by cash flow statement. Hisrich, Peter & Shepherd states that â€Å"Cash flow results from the difference between actual cash receipts and cash payments† (1998:p.297). The difference between cash flow statement and profit statement is that cash flow doesn’t consider payment of non-cash expenses, payment of loan principal and withdrawals. (Rosemary, 2010) Profits are generated by subtracting operating expenses from sales and it is calculated through income statement. Income statement tells about the total sales made during the year whether or not sales receipts are collected or not. In June, Hidetoseek Ltd. is incurring profit but its cash flow is negative which shows that company’s expenses are greater than receipts. Therefore, it should use bank overdraft to meet its expenses. If retained earnings are used, the liquidity position of the company is badly affected. The cash reserves of company decreases which means that if the company wants to pay for its debts or incur some capital expenses, it will not be able to raise significant funds through its reserves. An overdraft occurs when