Cash Flow Statements Flashcards
Assess to what extent a cash flow statement would be of benefit to potential shareholders in deciding whether or not to invest in x plc/ltd
Cash flow statements allow shareholders to see why profits differ from the cash position of the business by identifying the cash flows into the business and also the cash outflows and more importantly how cash flows have been used
A cash flow statement allows shareholders to see if the business is generating sufficient cash to pay taxes and dividends. In this case, cash flows cover these appropriations around x times. It shows to what extent cash flows are internally and externally generated.
Cash flow statements must be read in conjunction with income statements and balance sheets since each statement only shows one aspect of the businesses’ activities. Current cash flow statements must be compared with previous ones to allow trends to be determined
Assess two sources of finance used by x plc/ltd
Explain two limitations of published financial statements for potential shareholders in x plc/ltd
Published financial statements are in summary form and therefore don’t necessarily provide enough detailed relevant information to assist with decision making such as whether to buy or sell shares
Some aspects of the financial statements are subjective including the measurement of profit and this could hinder comparisons being made between different investment opportunities.
The financial statements are historic and don’t necessarily reflect the current performance levels. This makes them more difficult to use for predicting the future including an ability to pay dividends and the impact on share prices, external factors such as current economic climate, e.g. inflation
Explain two reasons why the statement of cash flows would be useful to a debenture holder of x plc/ltd
To find out if any loans have either been advanced and repaid
Mention gearing
Debenture holders would be able to assess how their loans are being used in the business
A debenture holder would also be interested in determining the ability of the company to repay their loan in the future
Discuss the benefits that a shareholders in x plc/ltd might gain from the publication of the statement of cash flows
The statement of cash flows enables shareholders to assess the performance of the business bc it focuses on cash where it comes from and on what it has been spent which is essential for short-term survival of business and could affect the company’s ability to pay dividends
It provides shareholders with information not shown in the income statement /balance sheet for example such as cash generated from operations
It enables shareholders to distinguish between internally and externally generated finance
Explain how it’s possible for a business to make a profit but have a decease in cash resources
Profit is measured on an accruals basis and cash is measured where it is actually received or paid
Some transactions affect profit (income statement) but not cash (give examples)
Some transactions affect cash but not profit (income statement) (give examples)
Some transactions affect both cash and profit but at different times
Assess the performance of x plc based on the statement of cash flows for the business. Identify the key changes in the liquidity of the company and discuss the implications of these changes for the company.
