Cash Flow
Autor: Shine336 • March 6, 2016 • Course Note • 529 Words (3 Pages) • 642 Views
Page 1 of 3
- Functions or uses of the cash flow statement:
- Provides a clear picture of an aspect of the entity’s performance and position that is not so clear in reviewing the P/L and B/S. ie
- viability of core operations
- payments to suppliers, creditors
- collections on debtors
- dividends, interest and other payments
- payments for NC assets
- access to cash, likely access in the future
- profit does not equal cash, so adds another aspect to the information we can obtain about an entity
- generally, users have an interest in cash flow performance, as this generally gives some indication of expected return (ie. dividends)
- the importance of cash for survival is known, hence the CFS gives some indication of the future prospects for the firm
- CFS gives some indication of the firm’s command over economic resources and how that command was exercised
- Helps management to discharge its accountability function, by indicating how it has used the cash under its control.
- reasons for the reconciliation:
- profit does not equal cash flow, hence the information content of the reconciliation
- provides an explanation of some *(non-cash) aspects of profit such as: impact of depreciation, credit sales etc,
- cash may be the ‘lifeblood’ of the company, but CFS should supplement, not substitute for the P/L.
- May, to some extent assist users to understand that there is a relationship between profit and cash from operations – and demonstration of this would seem essential, since most can relate to cash, but less can relate to profit.
- Cash is more important…
- Covered somewhat in the comments above.
- Yes, cash is the lifeblood of the company, but this is not to say the cash flow statement is necessarily the most important statement. Rather, each statement provides a different perspective on the position and performance of the firm;
- CFS helps to explain successive balance sheets and to explain the cash consequences of operating activities;
- CFS on its own is an incomplete measure of performance as it neglects the impact of credit sales, non-cash expenses etc.
- CFS, when used in conjunction with the other statements, provides a comprehensive view of the position and performance of the entity.
- the analysis…
- overall decrease in cash a possible concern. Current liabilities were significantly reduced, which accentuated the decrease. Need to investigate whether the company was making best use of its credit facilities.
- Net loss from investing activities, but perhaps this is predictable since old assets are being sold for new, and this could indicate an entity going through an expansion phase.
- Operating loss, although much of this seems to be due to high depreciation and amortisation. This could indicate the need to reconsider assets sales.
- Net cash result from financing activities is zero, indicating that inflows matched outflows. Need to establish whether the entity is borrowing more when clearly at risk.
- More information needed in the following areas:
- Need more information as to why current assets have decreased…is the entity running down its stock?
- Other years
- P/L, B/S
- Breakdown of debt – payment details, due dates etc.
- Information on assets (age, depreciation policy etc.)
- Credit terms on debtors, creditors, Salability of stock
- No inflows from financing – perhaps need to issue shares
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