Class, There is a lot to cover this week before the final so even though some students have not gotten involved yet, I want to keep going. You have provided some good definitions of the cycles.
When you compare these two cycles (cash and operating), be aware of how cash can affect the business. Cash one of the most important elements to ensure companies are working in a proper manner. Companies distribute cash to shareholders as dividends, use cash to pay employees and suppliers, as well as to repay loans, taxes and other debts. Intuitively we know that cash is a key element to ensure that the business can operate.
Keep in mind that not all transactions affect cash. There is a clear difference between the transactions that affect the cash balance of the firm and the financial statements of the firm. For instance, if you pay your electric bill with a credit card, will this affect your cash account? It sure will not as you are not disbursing cash, you are simply payment with a credit line. When you pay your credit card a month later or so, then you will pay with cash, affecting your cash account.
Look at the transactions below, how do you see these transaction affecting the cash account?
a. Goods are sold on credit
b. An interest payment on a notes payable is made
c. A payment due is received from a client
d. Dividends are paid to shareholders
e. Raw materials are purchased and paid for with credit
f. The electric bill is paid
g. A new machine is purchased and paid for with the business line of credit
h. Inventory is bought cash
i. Taxes due are paid
j. Funds from common stock sold are received
k. An old machine is sold for cash