Enhancing Cash Flows

A company that operates where I live

There's a branded coffee company Nespresso (https://www.nespresso.com/tw/en/) who selling espresso machines and coffee capsules in Taiwan. 

How does the company enhance its cash flows? 

To enhance cash flows, the company has inflow and outflow solutions. And there are also internal and external solutions.

Internal Solutions

Inflow Solution/Crowded

They open their stores at crowded places to enhance the sales since crowded streets relative to higher possibilities of product views. Higher sales mean higher inflows of cash.

Inflow Solution/Accelerate Cash Collections

No matter how excellent your products are, you still need a great checkout system to ensure your customers can easily pay for your products. Mobile payments such as Apple Pay, LINE Pay, or credit cards, debit cards, are increasing recently. If their stores only accept cash, their sales will drop down for sure. Prices of their espresso machines are not that cheap and It's not the amounts of money for everyone would like to carry. Credit cards also induce people to purchase more since it's not an immediate outflow from their pockets. Once the customers feel less pain on their purchases, they would like to buy more than expected.

Inflow Solution/Discounts

Are you experienced a buy one, get one free promotion? Or the second one is 40% off? These kinds of promotions induce your heart to think it's cheaper if you purchase more, and the company gets higher inflows of cash from sales. Festivals such as New Year, Christmas, or Thanksgiving, and Valentine's Day, are all opportunities to announce some activities or discounts. 

Outflow Solution/Controls

The future agreement is the solution for possible price changes in coffee supply, to reduce the fluctuations of their cash outflows, and a long-term supply contract might also get better prices. Moreover, their expenses are outflow "on time", the electronic system is scheduled to pay for checks. In order to take better control of there cash flows internally, there are sensors and cameras around their store, also a passcard is needed for accessing the register. From the beginning, they even have to detect the counterfeit money by using a detector of counterfeit money. 

Does it contact outside parties to obtain investment funds by issuing stock, bonds, or borrowing in another way?

Nespresso Coffee Stores is a brand of the Nestlé Group. The Nestlé Group issues billions of shares of stock to obtain more operating funds from investors around the globe. Although this solution dilutes the ownership of original owners, it still a necessary step for such a big international company. Your shares can be much worthy if they use the funds effectively.

Instead of issuing stock, Nestlé sold some departments of their company. For instance, their famous brands like Haagen-Daze, Dreyer's and Drumstick are sold to Froneri company for cash. 

Reference

Chapter 6: Cash and Highly-Liquid Investments. (n.d.). Retrieved from 

https://www.principlesofaccounting.com/chapter-6/

Nestlé. (2020, March 1). Retrieved from https://en.wikipedia.org/wiki/Nestlé

The Accounting Cycle

Now we begin to look at the "accounting cycle", culminates in closing the books and producing financial statements. While expanding the picture to take in the full accounting cycle and culminates in closing the books and producing financial statements, balances of some accounts are carried forward from period to period, some were not. To understand why, we need to know the differences between these two types of account, which are "nominal" and "real" accounts. 

The Nominal Accounts

The nominal accounts are revenue, expense, and dividend accounts, these accounts must be reset to begin the next accounting period. 

The Real Accounts

The real accounts are asset, liabilities, and equity accounts, these accounts must be carried forward from period to period. 

What Are The Differences?

1.Reset or not

The balance of the real accounts, asset, liabilities, and equity accounts, be carried forward from period to period. In contrast, the nominal accounts are revenue, expense, and dividend accounts, these accounts must be reset to begin the next accounting period. For instance, It's just like your bank accounts, the balance of the account(Real account) is carried forward while you deposit or withdraw. The nominal accounts, on the other hand, reflect the amounts of your deposit and withdraw.

2.The Results or Happening

The amounts of revenues, expenses, and dividend accounts during a particular period, depending on how much you earned or paid. In short, it's the happening events of the period. In contrast, the amounts of assets, liabilities, and equity depend on the results of the prior, it's the achievements that you have already done before measuring the revenues, expenses, and dividends. Recall the example of your bank account, your balance reflects the result of your deposits and withdraw. Your deposits and withdraw are printed on the record of transactions, they are events and activities of your account, reflect the happening nominal events.

Why are they so-called?

The reason why they are so-called "nominal" and "real" accounts, is actually achieved or not. As we know that the net income equals revenues minus expenses, so we have the actual increase or decrease on the balance sheet after the result of the net income. If you have $1,000,000 in revenue, but you also have $1,000,000 in expense, you will end up with zero increase in the assets. Moreover, if the expense is $2,000,000 , you will end up with $1,000,000 in liabilities. The result will finanlly accumulate to the real accounts, the balance sheet, assets, liabilities, and equity.

What type of information is contained in nominal accounts?

Since the nominal accounts are the revenues, expenses, and dividend accounts, so they contain the information to record revenues, expenses, and dividend accounts. The information contained in nominal accounts is usually income statement accounts such as revenue data, expense data, and gain or lose data.

What types in real accounts? 

The real accounts are also known as capital accounts, which contain balance sheet accounts, asset data, liability data, and equity data. 

Which financial statement contains the information from nominal accounts?

Obviously, the income statement contains the information from nominal accounts, since it has the amounts of revenues and expenses.

Which contains the information from real accounts?

Clearly, the balance sheet involved assets, liabilities, and equity, which contains the information for real accounts.

References

Walther, L. M. (2012). Principles of accounting. Logan, UT: Utah State University. Retrieved from https://www.principlesofaccounting.com/chapter-4/

Which journal should be used to record each of the following transactions?

Medical Supply Company uses a cash receipts journal, a cash payments journal, a sales journal, a purchases journal, and a general journal. 

Which journal should be used to record each of the following transactions?

A. Payment of Property Taxes

Cash Payment Journal

B. Purchase of Office Equipment on Credit 

General journal 

C. Sale of Merchandise on Credit

Sales Journal

D. Sale of Merchandise for Cash

Cash Receipts Journal

E. Cash refund to a customer who returned Merchandise

Cash Payment Journal

F. Return of Merchandise to a supplier

General journal 

G. Adjusting entry to record depreciation

General journal 

H. Purchase of a delivery truck for cash

Cash Payment Journal

I. Purchase of merchandise on credit

Purchases journal.

J. Return of merchandise by a customer company for credit to its account

General journal 

Would you extend trade credit to your customers?

As a proprietor of "Starbruce"

As a proprietor of the "Starbruce" construction company that sells houses, offices, and other buildings in Taipei, I offer multiple types of houses and buildings to individuals and business owners. Further, I also offer decorating services, to help my clients create a comfortable place with warm lighting and comforting interiors, and a beautiful cozy atmosphere. Starbruce’s vision is to be the leading construction company in all markets and to build a legacy of excellence.

Should I extend trade direct credit to your customers? 

The answer is sometimes yes, sometimes not. It's similar to a poker game. If we know the chance of uncollectible is pretty low, we will reduce the bids we put on them. With information technology, we can do the investigation much better. 

Why?

Yes, some people do deserve our trust. Credit sales can entice customers to make a purchase decision. However, trust must be earned. With a membership program, I can trust my customers who already earned my trust. I don't want to treat everyone with the same rules since there is always someone you can rely on and someone just can't. 

Why not?

Every devil was once an angel. As I said, in the real world, there is always someone we can trust, but someone just can't. Credit sales facilitate many business transactions, but it is also costly. Moreover, It's an opportunity cost, which means I must forego the alternative uses of the money while credit is extended. 

How will this decision affect my sales and profits?

Although credit sales are costly, it facilitates many business transactions. That's also why we do this, why we often take the risk. 

For instance, suppose my company builds a house for sale, and the price is $300,000, but my client only has $200,000 cash on hand. And my client can not get any more funds from banks because of the credit limit. In this case, I have to decide whether I should offer a $100,000 direct loan to the potential client or not. If I do, I have to forego the alternative uses of the money and take the risk of the uncollectible expenses. But it can be a good deal, the direct loan induce the client to make the purchasing decision, and it's worthwhile if the collections of the payments are smooth. While the house is delivered, the $300,000 is recognized as revenue. Therefore, I have $200,000 inflow of cash, and $100,000 notes receivable. 

If I don't offer any direct loan to the potential client, I will lose the deal, the $300,000 revenue, $200,000 inflow of cash, and the $100,000 notes receivable. However, I don't have to take the risk and feeling stressed about the receivable. Also, I can put the $100,000 on a treasury bond to gain my profits. 

How would I ensure that my firm is paid by its clients?

In the business field, I always thinking about how to get a win-win situation. I gain my profits and my clients get great deals. However, trust must be earned. The first step is to check the credit history of the client which is a normal procedure of doing business, to ensure they have the ability to repay the direct loan. The first step is the most important one I think because it reduces the risk substantially in the first place. 

To reduce the risk, I will request some collaterals, such as the house. The step is to increase their opportunity cost when they really have to decide to repay or not. Because of the collaterals, they have to make their choices among the opportunity cost. Would you like to risk your future on a payment you can afford? That's the third step, affordable. 

Everyone has their affordable life and products. My firm does not offer a direct loan to individuals or business owners who can not afford it in the first place. The future may be unpredictable, but the past has clear records. What you have done, what you have achieved, are the basic start point. For instance, if my client's life is struggling at around $1,000 per month, my firm does not offer a direct loan to the client if the loan has to be repaid $999 per month. 

How would you account for those who fail to pay?

As we learned from this chapter, there are "Direct Write-Off Method" and "Allowance Methods".  Under the direct write-off method, a bad debt is charged to expense as it apparently shows not to be paid. The allowance method, on the other hand, is an estimate of the future amount of bad debt that is charged to a reserve account as a sale is made. In short, the keywords are estimating the future or not.

Normally, it depends on what is material? It is material if its omission or misstatement could influence the economic decisions of my firm's taken on the basis of the financial statements. Materiality is relative to the size and particular circumstances of individual companies.

It depends on the size. If my firm is a big construction company that has net assets worth $10 billion, a default by a customer who owes only $1,000 to my firm is immaterial to the financial statements of my firm.

It also depends on the nature. As my firm is a construction company, selling houses is a major source of revenue for my company, then this information should be disclosed in the financial statements as it is by its nature material to understanding my firm's scope of operations in the future.

Reference 

Chapter 7: Accounts Receivable. (n.d.). Retrieved from https://www.principlesofaccounting.com/chapter-7/

Materiality Concept. (n.d.). Retrieved from https://accounting-simplified.com/financial-accounting/accounting-concepts-and-principles/accounting-materiality.html