Question

12. State; 8p) a. the three sources of cash flows classified in a Cash Flow Statement and b. comment on how a sustainable company's cash flows be. (Assuming that it is not in a sizable investment phase) 13. Determine the following changes as source of cash or use of cash: (1p each, total 4p) Change Source of cash Use of cash Increase in Inventory Decrease in Accounts Payable Decrease in Plant & Equipment Increase in Common Stock 14. When testing a company's ability to meet short term liabilities, which ratio should you regard, if; (5p) a. the company has out of fashion inventories difficult to liquidate in a short time with a reasonable loss and b. the company has receivables from credible customers expected to turn cash within next 3 months. A. Debt ratio B. Equity ratio C. Current ratio D. Acid-test ratio E. Cash ratio 15. Although you know that, to reach a conclusion merely by looking to ratios is not possible, the Price higher ratios such as Earnings or Book Value ind Price indicates in general; (3) A. A relatively higher assets turnover B. A relatively higher profitability C A relatively higher share price D. A relatively higher efficiency E. A relatively higher liquidity

Answer 1

Answer:-

Q 12)

The three sources of cash flows classified in the cash flow statement are:-

1) cash flow from operations- These are inflows and outflows of cash derived from transactions that effect the net income of the firm. The examples of the operating cash flows are cash collected from customers, cash paid to employees and suppliers, cash from interests and dividends, cash paid for interest and taxes etc.

2) cash flow from investing;- These are cash inflows and outflows resulting from transactions of long term assets like PP&E and certain investments. The examples of these investing activities are proceeds from sale of fixed assets, purchase of assets, purchase of debt and equity investments, proceeds from sale of debt and equity investments, principals from loans made to others etc.

3) cash flow from financing:- These are cash inflows and outflows from transactions that effect the firms capital structure ie. debt and equity weightage of the firm. The examples of the financing activities are issue of debt, repayment of debt, issuing stocks, repurchase of stocks, principal paid on debt, dividends paid to shareholders etc.

b)

The sustainability of the cash flows in the case a firm is not in the investment phase is mainly driven by increase in revenues and sale of debt and equity instruments.The company is not investing in any of the expansion is able to mainly sustain its cash flow primarily from increasing its channels of sales so as to increase it revenues and net income. The company can look to sustain its cash flows as long as its cash inflows are more than its cash outflows ie, the net cash flow should be positive.

Note:- Kindly put other questions in separate posts