Can you help me respond to this post A cash flow statement i

Can you help me respond to this post

A cash flow statement is critical because it helps management analyze the organization\'s finances. It helps determine whether there is enough cash flow to cover expenses such as payroll. It is also beneficial to compare the operating activities expenses to the net income. If the cash reported is higher than the net income, that is a good sign for the company. Non-cash items are added back to the profit in order to have a near actual expenses incurred. We also need to adjust the net income figure so it is not reduced by the depreciation expense. This is why we add non-cash items back. The profit then ends up showing a smaller number. A company can have a positive net income but a negative cash flow from operating activities because net income can be increased by non- cash items that don\'t affect cash flow. Cash flow can be decreased by actual cash payouts that might not be considered an expense deduction for net income. Some non-cash activities are mentioned in the statement of cash flow because they may have a significant impact on the current and future performance in terms of revenue, profits, and the ability of the organization to produce positive cash flows. One example may be issuance of stock to retire a debt.

Solution

A Statement of Cash Flows (or Cash Flow Statement) shows the movement in the Cashaccount of a company.

the Primary Purpose of the Statement of Cash Flows

1.The primary purpose of the statement of cash flows is to provide information about cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period.

a. The Statement of Cash Flows identifies cash flows as being generated from three sources:  

i. Operating Activities:- 1. Operating activities include the cash effects of all transactions that create revenues and expenses and thus enter into the determination of net income. i.In general Operating activities are those activities that the business was created to perform and also includes interest from any source and any other type or revenue producing (other revenue) types of activity i. Operating activities is the most important category because it shows the cash provided or used by company operations. ii. Cash provided by operations is generally considered to be the best measure of whether a company can generate sufficient cash to continue as a going concern and to expand.

ii. Investing Activities:-1. include all those activities involve in long-term uses or sources of cash. i. purchasing and disposing of investments and productive long-lived assets using cash and ii.lending money and collecting the loans. i. Note that any interest revenue or expenses from these activities are operating activities

iii. Investing Activities:- 1. Include obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from stockholders and paying them dividends i.Note that Dividends received or paid are operating activities

Why Cash Flow Analysis?

Cash flow analysis measures how much cash is generated and spent by a business during a given period of time. I think it is the best measure of a company’s performance because:

It can be measured and compared. Cash is tangible, quantifiable and can be measured in standard units acceptable to anyone. When comparing two companies—no matter how different—cash flow is a vehicle for preparing a true “apples to apples” comparison.

It’s difficult to fake. There are many unscrupulous techniques that can be used to inflate profits, to artificially increase the value of assets or to otherwise temporarily make a business look more successful than it really is. It’s difficult though to do the same with cash.

It’s universally accepted as a store of value. You don’t have to convince anyone as to the value of $10 million in cash. The same cannot be said for other assets like intellectual property, good will, depreciated equipment and more. A used forklift may be worth something to the owner of a warehouse but it’s worthless to a writer. An idea may be valuable to some people and useless to others. Everyone accepts cash.

THE CASH FLOW IMPORTANCE

Cash can come from both internal and external sources, and the Statement of Cash Flow helps companies and investors separate and observe the differences and extent of the cash inflows and outflows. Internal, as opposed to external cash sources, provide a company with successful attributes and assurances that include:

1) preventing and monitoring company debt

2) preventing unnecessary expenditures from interest, late payment penalties and debt costs

3) ensuring timely investment and cash available for investment opportunities

4) ensuring timely payment of expenses and debts

5) and most importantly – ensuring a level of regular business income without relying on outside investment or cash borrowing.

Effectively managing and monitoring cash flows serves many purposes. The most significant reason is to provide owners and managers insight into the company’s cash position. This knowledge better equips management to make informed decisions about regular business operations, the need for further investment in the business, and capital from equity or debt partners. Cash management is something most businesses of all sizes struggle to perfect. While the Cash Flow Statement is by no means the only method of monitoring cash flows, it is an integral part of the reporting statements and should not be overlooked by the financial statement users.