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a. investors assess the entity’s ability to generate cash from its operations, relate its

profitability with its cash generating ability, evaluate its ability to maintain and expand
its operating capacity, to meet its financial obligations and to pay dividends.

b. managers evaluate past operations, check the accuracy of past assessment and then plan
future investing and financing activities.

c. investors, creditors and other interested parties assess the entity’s profit potential and

ability to pay its maturing debt.
d. analyst and other users develop models to assess and compare the present value of the

future cash flows.

5.1 The Nature of cash and cash equivalents

Definition of cash and cash equivalent

Cash comprises cash on hand and demand deposits. Cash equivalents are short-term,

highly liquid investments that are readily convertible to known amounts of cash and that
are subject to an insignificant risk of changes in value. Cash and cash equivalents are used

by entities in their daily activities such as operating, investing and financing.

Cash & Cash Equivalents

Bal (b/d) Bal (c/d)

Cash in hand xx xx

Cash at bank xx xx

Short-term investment xx xx

Bank overdraft (xx) (xx)

Cash & cash equivalent XXX XXX

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