What does a business owner do when the cash balance approaches zero and there are bills to be paid? (Hint: look at the financing activities of the Cash Flow Statement and then look at the Retained Earnings statement)
What does a business owner do when there is an accumulation of cash in the checking account? (Hint: look at the investing activities of the Cash Flow Statement)
When the cash balance approaches zero and there are bills to be paid, a business owner typically takes certain actions to manage the situation. To understand these actions, we can look at the financing activities section of the Cash Flow Statement and the Retained Earnings statement.
First, let's consider the financing activities section of the Cash Flow Statement. This section shows cash inflows and outflows from activities related to the company's financing, such as issuing or repurchasing stocks and bonds, taking on or repaying loans, and paying dividends.
If the cash balance is low, the business owner may explore financing options, like obtaining a short-term loan or line of credit, to cover the immediate bills. This can help provide the necessary cash infusion to meet the obligations.
Next, let's consider the Retained Earnings statement. This statement shows the change in the retained earnings account over a specific period. Retained earnings are the accumulated profits that a company has not distributed to its owners or shareholders.
If the cash balance is low, the business owner may decide to selectively distribute retained earnings as dividends to cover the bills. However, this decision depends on various factors, such as the availability of retained earnings and the business's long-term financial goals.
In summary, when the cash balance approaches zero and there are bills to be paid, a business owner can take actions such as seeking financing options and selectively distributing retained earnings as dividends.
Now, let's move on to the second question.
When there is an accumulation of cash in the checking account, a business owner can analyze the situation by looking at the investing activities section of the Cash Flow Statement.
The investing activities section of the Cash Flow Statement provides information about cash inflows and outflows related to the purchase and sale of long-term assets, such as property, plant, and equipment, as well as investments in other companies.
If there is excess cash in the checking account, the business owner may consider investing this cash for better returns. They can explore investment options like purchasing stocks, bonds, or other financial instruments. This can help the business generate additional income and potentially increase the value of its assets.
The decision to invest the excess cash depends on factors such as the business's financial objectives, risk tolerance, and market conditions. It is important for the business owner to conduct thorough research or consult with financial professionals to make informed investment decisions.
In summary, when there is an accumulation of cash in the checking account, a business owner can consider investing the excess cash in order to potentially generate additional income and increase the value of the business's assets.