Preparation of Cash Flow Statement - Cash Flow Analysis, Financial Analysis and Reporting | Financial Analysis and Reporting - B Com PDF Download

Ans. A cash flow statement is a financial statement that provides information about the cash inflows and outflows of a company during a specific period. It shows how a company generates and uses its cash, which is crucial for assessing its liquidity and financial health. The cash flow statement is important in financial analysis and reporting because it helps investors, creditors, and other stakeholders understand the cash flow trends, assess the company's ability to generate cash, and evaluate its cash management policies.

Ans. The three main categories in a cash flow statement are operating activities, investing activities, and financing activities. - Operating activities include the cash flows from the company's core business operations, such as cash receipts from sales, payment to suppliers, and payment of wages. - Investing activities include the cash flows from buying or selling long-term assets, such as purchase or sale of property, plant, and equipment, investments in other companies, and loans made to other entities. - Financing activities include the cash flows related to the company's capital structure, such as issuance or repurchase of shares, issuance or repayment of debt, and payment of dividends.

Ans. The net cash flow from operating activities is calculated by adjusting the net income for non-cash expenses and changes in working capital. It is derived using the indirect method, which starts with the net income and makes adjustments for non-cash expenses (such as depreciation and amortization) and changes in working capital items (such as accounts receivable, accounts payable, and inventory). To calculate the net cash flow from operating activities, the following steps are followed: 1. Start with the net income. 2. Add back non-cash expenses, such as depreciation and amortization. 3. Adjust for changes in working capital items, such as accounts receivable, accounts payable, and inventory. 4. Include any other operating cash flows, such as interest paid or received and taxes paid. 5. Sum up all the adjustments to the net income to arrive at the net cash flow from operating activities.

Ans. A cash flow statement can help in assessing a company's liquidity by providing information about its cash inflows and outflows. By analyzing the cash flow statement, stakeholders can determine whether the company has enough cash to meet its short-term obligations and fund its operating activities. Specifically, the cash flow statement enables stakeholders to calculate the cash flow ratios, such as the cash flow from operating activities to current liabilities or cash flow from operating activities to sales. These ratios indicate the company's ability to generate cash from its core operations and the sufficiency of its cash reserves to cover short-term obligations. Additionally, the cash flow statement allows stakeholders to identify any negative cash flow trends or significant changes in cash flow patterns that may indicate potential liquidity issues. By monitoring the cash flow statement, stakeholders can assess the company's ability to maintain a healthy level of liquidity.

Ans. The information provided in a cash flow statement can be useful for investors and creditors in several ways: 1. Assessing solvency: Investors and creditors can evaluate a company's solvency by analyzing its cash flow from operating activities. A positive and growing cash flow from operations indicates that the company is generating sufficient cash to cover its obligations, making it more likely to meet its debt repayment and interest obligations. 2. Analyzing investment potential: Investors can use the cash flow statement to assess the investment potential of a company. By examining the cash flow from investing activities, investors can determine whether the company is investing in growth opportunities or divesting from non-profitable assets. This information can help investors make informed decisions about the company's future prospects and potential return on investment. 3. Evaluating dividend sustainability: For dividend-seeking investors, the cash flow statement provides insights into a company's ability to sustain dividend payments. By examining the cash flow from financing activities, investors can assess whether the company has sufficient cash reserves or generates enough cash to continue paying dividends in the future. 4. Comparing profitability and cash flow: Investors and creditors can compare a company's profitability (as indicated by the income statement) with its cash flow statement to identify any discrepancies. If a company reports high profits but low cash flow, it may suggest potential issues with cash management or aggressive accounting practices. 5. Assessing financial flexibility: Creditors can use the cash flow statement to evaluate a company's financial flexibility. By analyzing the cash flow from financing activities, creditors can determine the company's ability to raise additional funds or repay debt. This information helps creditors assess the company's creditworthiness and make informed decisions about lending or extending credit to the company.