Question

1. Often, investors will examine the cash flow statement to understand how a company uses its cash to “fund” its operations and invest is long-term productive activities, such as property and machinery or to acquire businesses.   

Required:Explain the benefits of using cash generating from operations to fund operations and make long-term productive investments as compared with other forms of financing, such as long-term debt or by issuing common stock.

Answer 1

The benefit of using cash generated from operations to fund operations and long term productive investments would be higher as compared to long term debt or issuing common stock are:

1. The cash from operations would need no fixed return like interest,

2. It would increase the existing shareholders' wealth since there would be more productive investments,

3. There would be no dilusion of Equity,

4. The cost of borrowing or raising equity would not be incurred,

5. The organization would be able to manage funds better as there would be no fixed cost associated to the returns (interest).