As a complement to the balance sheet and the income statement, the statement of cash flows is an informative statement for analysts for the following reasons:
• Analysts who understand the types of information this statement presents and the kinds of interpretations that are appropriate find that the statement of cash flows reveals information about the economic characteristics of a firm’s industry, its strategy and the stage in its life cycle.
• The statement of cash flows provides information to assess the financial health of a firm. Analysts increasingly recognize that cash flows do not necessarily track income flows. A firm with a healthy income statement is not necessarily financially healthy, and vice versa. Cash requirements to service debt, for example, may outstrip the ability of operations to generate cash.
• The statement of cash flows highlights accounting accruals, which can provide insight into the overall sustainability and quality of a firm’s reported earnings.
The primary purpose of the statement of cash flows is to provide financial statement users with information about a firm’s cash receipts and payments. Implicit in this objective of providing information on the net cash flows of a period is reporting the sources and uses of cash that cause the change in the cash balance on the balance sheet. This is accounting in its simplest form: Beginning Cash _Cash Receipts _ Cash Expenditures _ Ending Cash Balance
An understanding of a firm’s cash flows is an integral part of each of the six steps in financial statement analysis discussed in Chapter 1 These are:
Identify the Economic Characteristics of a Business
Identify the Strategy of the Firm
Adjust the Financial Statements for Nonrecurring, Unusual Items
Analyze Profitability and Risk
Prepare Forecasted Financial Statements
Value the Firm
Required
Discuss how the statement of cash flows integrates into the above six steps of analysis.
A Cash-flow statement aims at helping the management in the process of short-term financial planning. A Cash-flow statement is useful to the management in assessing its ability to meet its short-term obligations such as trade creditors, bank loans, interest on debentures, and dividend to shareholders and so on. A Funds flow statement is very helpful in intermediate and long-term planning, because though it is difficult to plan cash resources for two, three or more years ahead yet one can plan adequate working capital for future periods.
Cash flow statements are of great importance to a financial manager. The information contained in cash flow statement can help the management in the field of short run financial planning and cash control. Some of the important advantages of Cash-flow statements are discussed below:
1) The projected cash flow statements disclose surplus or shortage of cash well in advance. This helps in arranging surplus cash as bank deposits or investments in marketable securities for short periods. Should there be shortage of cash, arrangement can be mode for raising the bank loan or sell marketable securities.
2) Cash-flow statements are of extreme help in planning liquidation of debt replacement of plants and fixed assets and fixed assets and similar other decisions requiring outflow of cash from the business as they provide information about the cash generating ability of the business.
3) The cash flow statement pertaining to a particular year compared with the budget for that year reveals the extent to which the actual sources and applications of cash were in consonance with the budget. This exercise helps in refining the planning process in future. The inter-firm and temporal comparison of cash flow statements reveals the trend in the liquidity position of a firm in comparison to other firms in the industry. It can serve as a pointer to the need for taking corrective action if it is observed that the management of cash in the firm is not effective. Cash-flow statements are more useful in short-term financial analysis as compared to fund flow statements since in the short run it is cash which is more important for executing plans rather than working capital.
As a complement to the balance sheet and the income statement, the statement of cash flows...
As a complement to the balance sheet and the income statement, the statement of cash flows is an informative statement for analysts for all the following reasons except: a. The statement of cash flows highlights accounting accruals, which can provide insight into the overall sustainability and quality of a firm’s reported earnings. b. Analysts who understand the types of information this statement presents and the kinds of interpretations that are appropriate find that the statement of cash flows reveals information...
Earnings Quality Economic income is considered to be a better predictor of future cash flows than accounting income is. A technique used by securities analysts to determine the degree of correlation between a firm’s accounting earnings and its true economic income is quality of earnings assessment. Required: Discuss measures that may be used to assess the quality of a firm’s reported earnings. Obtain an annual report for a large corporation and perform a quality of earnings assessment.
purposes of the Income Statement, the Balance Sheet and the Statement of Cash Flows. What information is shown on the Statement of Cash Flows that is not reported on either the Income Statement or the Balance Sheet? Describe some typical items shown in the operating section of a Statement of Cash Flows. Describe some typical items shown in the investing section of a Statement of Cash Flows. Describe some typical items shown in the financing section of a Statement of...
After reviewing the three financial statements (balance sheet, income statement, and statement of cash flows), discuss which financial statement you find most useful. Explain why you have chosen this statement and provide specific examples of the information that the statement includes.
After reviewing the three financial statements (balance sheet, income statement, and statement of cash flows), discuss which financial statement you find most useful. Explain why you have chosen this statement and provide specific examples of the information that the statement includes.
Identify the financial statement: Balance Sheet, Statement of Shareholders’ Equity, Income Statement or Statement of Cash Flows. 1. The amount of cash the business generated from selling its products during the most recent business year. 2. The amount of expenses the firm incurred in its most recent month of operation. 3. The total amount of equipment owned by the firm on December 31. 4. The amount of money invested into the corporation by shareholders during the last business year.
How does the accounting system expressed in the balance sheet, income statement, and statement of cash flows contribute to the education of investors and other users of these financial statements?
Do the balance sheet, income statement, and statement of cash flows contain all the information you might want as a potential lender or stockholder? Why or why not? What other information would you like to examine (accounting or otherwise), and why would this information be helpful?
Healthcare financial executives normally use the balance sheet, income statement, and statement of cash flows as their three main documents for financial review. Each of these documents is different, but each one has its own business purpose and uses the healthcare administrator. For this discussion, please pick one of the three statements, analyze it use, and provide an example as it is used in a real business situation. You will be able to find a good example on the Internet.
The income statement, balance sheet, and statement of cash flows are the three main financial statements that every business uses and are essential for a manager to review on a monthly basis. If the financials that you were analyzing showed a profit of $200,000, cash deficit of $400,000, and debt of $800,000, then what strategies would you put in place to maintain profit, increase cash flow, and decrease debt?