5.9: Usefulness of Statement of Cash Flows Flashcards
Why is cash flow considered more important than net income for a company’s survival?
Cash flow is a company’s lifeblood, as it is crucial for paying bills, investing in operations, and expanding.
Even if a company reports positive net income, insufficient cash flow can lead to a cash crunch and difficulty meeting obligations.
What do creditors look for in the statement of cash flows?
How successful the company is in generating net cash from operating activities.
The trends in net cash flow from operating activities over time.
The reasons for positive or negative net cash flow from operating activities.
Whether the cash flows are sustainable or expected to be repeated over time.
What does a low or negative amount of net cash provided by operating activities indicate?
It suggests that the company did not generate enough cash from its operations and may need to borrow funds or issue equity securities to raise additional cash.
What is the formula for the Current Cash Debt Coverage Ratio?
Current Cash Debt Coverage Ratio = Net Cash Provided by Operating Activities / Average Current Liabilities
What does the Cash Debt Coverage Ratio assess?
It measures a company’s financial flexibility and its ability to repay total liabilities from cash generated by operating activities.
What is the formula for the Cash Debt Coverage Ratio?
Cash Debt Coverage Ratio = Net Cash Provided by Operating Activities / Average Total Liabilities
What does the Cash Debt Coverage Ratio assess?
It measures a company’s financial flexibility and its ability to repay total liabilities from cash generated by operating activities.
What is the formula for Free Cash Flow?
Free Cash Flow = Net Cash Provided by Operating Activities - Capital Expenditures - Dividends
What questions can free cash flow analysis answer?
Can the company pay dividends without external financing?
If business declines, can the company maintain capital investment?
What cash flow can be used for additional investments, retiring debt, or purchasing stock?
