Cash flow statements & Interpretation of financial statements

Question 1

What is a Cash flow statement and it’s actvities?

Answer 1

What it is: A financial statement that summerises the liquity position of a company through it’s cash inflows and outflows.
Activities: Operating- Cash generated by a company’s business activites.
: Investing- Cash generating from the acquisition & sale/disposal of non current assets.
: Financing- Cash generated from raising funds to run the company

Question 2

What is the cash flow statement’s benefit to users?

Answer 2

1) Indicates liquidity & solvency.
2) Easy to understand and compare.
3) Helps forecast for the future.
4) Meets user’s need(Suppliers, Lenders, Managers & Shareholders.)

Question 3

Who are users of ratios?

Answer 3

1) Shareholders: Good return?
2) Management: Is the company efficient?
3) Investment analysts: Sell or Buy stock?
4) Lenders: Will we be repaid?
5) Suppliers: Will the company pay us?
6) Competitors: How do we compare?

Question 4

Limitations of ratios?

Answer 4

1) Data
2) Seasonal factors
3) Only focuses on financial info
4) Difficult to know if ratios are good or bad