Cash flow analysis

Cash flow analysis

1. Chapter 13 Cash flow analysis

2. Cash Flow A statement of cash flow is a component of financial statements summarizing the operating, investing and financing activities of an entity.

3. Purpose of Statement of Cash flows It gives us useful information in assessing the ability of the entity to generate cash and cash equivalents It enhances the comparability of operating performance by different entities Users of an entity’s financial statements are interested in how the entity generates and uses cash and cash equivalents

4. Creditors High Amount Low Amount Creditors are one of those who examine the cash flow statements because they are concerned about being paid.

5. Creditors look for answers to the following questions in the company’s cash flow statements: Is the company generating sufficient positive cash flows from its ongoing operations to remain variable? Will the company be able to meet its financial obligations to creditors? What expansion activities took place and how were those financed?

6. Will the company be able to pay its customary dividend? Why did cash decrease even though a net income was reported? To what extent will the company have to borrow money in order to make needed investments? What happened to the proceeds received from the issuance of capital stock?

7. Information that should be assess and evaluate A company’s ability to generate positive future net cash flows A company’s ability to meet its obligations and pay dividends A company’s need for external financing The reasons for differences between a company’s net income and associated cash receipts and payments

8. The reasons for differences between a company’s net income and associated cash receipts and payments Both the cash and noncash aspects of a company’s financing and investing transactions during the accounting period.

9. Financial Liquidity Refers to the “measures to cash” of assets and liabilities. Formula: Net cash provided by operating activites = Current Cash Average current liabilities Debt Coverage Ratio

10. Financial Flexibility Refers to a company’s ability to respond and adapt to financial adversity and unexpected needs and opportunities Formula: Net cash provided by operating activites = Current Cash Average total liabilities Coverage Ratio

11. Free Cash Flow Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.