Determine the companys sources and uses of cash

Assignment Help Corporate Finance

Reference no: EM131678116

Assignment

Describe the following terms as they relate to the statement of cash flows: cash, operating activities, investing activities, and financing activities. What can creditors, investors, and other users glean from an analysis of the statement of cash flows?

Elements of a Statement of Cash Flow A cash flow statement indicates flow of cash into and out of a business organization. In most cases, an organization's cash in hand is lower than operations, although both have to be equal and this is attributed by outstanding bills still not paid by customers. A cash flow statement helps managers:

a. Establish the changes in a company's cash at hand from the activities undertaken over a given reporting period.

b. Determine the company's sources and uses of cash.

c. Understand operating results throughout a given operating period.

There are three types of financial activities detailed in a cash flow statement, which include operating activities, investing activities, and financial activities. A cash flow statement can take two forms: direct format and indirect format.

1. Direct method: categorizes main classes of cash receipts and cash payment differently.

2. Indirect method: focuses differentiating net income and net cash flow from a company's operations.

This is the commonly used method due to its ability to offer a limited amount of information. A cash flow statement can be compiled with the company's balance sheets and income statements of two years/accounting periods (Heakal, 2010). In calculation of statement of cash flow, line items in which cash was used are adjusted from the net income. The cash flow statement includes line items found in the balance sheets. Net income line items from the income statement are also needed, in addition to income tax expenses and depreciation expenses (Heakal, 2010). A cash inflow on a cash flow statement is positive while cash outflow is negative. The operating activities include an adjustment part and the remainder part that indicates the necessary changes needed to reflect cash on hand after changes in the balance sheet items. Other line items in cash flow statements whose change is of significant influence include inventories, accounts payable and accrued liabilities. Adjustments, on the other hand, refer to cash flow changes based on components of the income statement that do not need cash. These include amortization, depreciation or deferred income taxes. Cash in a company can be spent in various activities, among them investing activities to help the company grow. These activities include:

a. Mergers or acquisitions

b. Major improvements to existing buildings

c. Major upgrades to existing factories and equipment

d. Purchase or sale of marketable securities

e. Purchase or sale of property, plant, and equipment

The operating activities' bottom line indicates how much cash a certain company has spent or generated from its operating activities. The other side of the cash flow statement represents the financing activities that need money to fund operations. To gain this money, a company can raise it from outside sources if it lacks enough internally. The bottom line of financing activities shows the net cash used to finance the business.

Forbes School of Business Faculty Reference:

Heakal, R. (2010). What is a cash flow statement? Forbes.

Text

Epstein, L. (2014). Financial decision making: An introduction to financial reports [Electronic version].

Article

Ford Motor Company. (2014). Ford Motor Company 2012 annual report.

Recommended Resources

Article

Heakal, R. (2010, May). What is a cash flow statement? Forbes.

Website

AccountingCoach. (2014). Cash flow statement (explanation).

Reference no: EM131678116

Questions Cloud

Operational analysis cost and price analysis : Supplier’s responsiveness Information from technical and operational analysis Cost and price analysis Personal relationship with salesperson

Show class probability minimizes the sum of squared errors : In the recursive construction of decision trees, it sometimes happens that a mixed set of positive and negative examples remains at a leaf node.

Create plans to improve business operations : Analyze some of the changes occurring in the way that organizations structure themselves and their work.

Find a consistent hypothesis for learning algorithm : Suppose that a learning algorithm is trying to find a consistent hypothesis when the classifications of examples are actually random.

Determine the companys sources and uses of cash : Determine the company's sources and uses of cash. Direct method: categorizes main classes of cash receipts and cash payment differently.

Identifying the short and long term consequences : Identifying the short and long - term consequences can help make the necessary adjustment to your plan.

What is upwelling : What is upwelling? What are at least three oceanographic or geographic situations that can cause it? Name at least six major areas of strong upwelling

Conduct an actual training : Review the reading in the text on the expectancy-value approach to attitudes and Review the Learning Resources with information on bullying, including cyber

Relation to atmospheric pressure systems : Watch a few TV weather forecasts and explain fair weather and storms in relation to atmospheric pressure systems (highs and lows).

User Account

All Pages