Solution 16.3

Liquid resources

Under the definitions section in FRS 1, liquid resources are those that can be realised (turned into cash) without disruption to the business of the entity or which can be traded in an active market. Examples are commercial paper, IOU’s and short-term investments readily convertible into cash at their carrying value or close to it.

Cash generated from operations

Cash flows from operating activities are the cash effects of transactions relating to the operating or trading activities of the business (the normal trading activities of the business, not capital activities). Operating cash flows will be concerned with:

• cash collected from customers

• cash paid to trade creditors for purchases

• cash paid to staff /PAYE/PRSI

• cash paid for services (overheads)

Non-cash item

Non cash items are accounting transactions that do not give rise to cash movements and thus would not appear in the cash or bank account of a business. These items would include the following:

1. Depreciation

2. Provision for bad debts

3. Profits or losses on the sale of fixed asset

These items would however appear in the profit and loss account of a business and hence will cause differences between operating profit and operating cash flow.

Operating activities

These are the normal trading activities of a business and include any transactions involving sales and the costs that are matched to those sales. Operating activities do not include any transactions involving financing, corporation tax, investment income, and capital investments.