mr lewis knowledge test

Question 1

benefits of statements of cash flows

Answer 1

• They can help shareholders to assess cash position (liquidity) of the business
• They show shareholders where cash has come from and where spent
• They provide some information not in the income statement or statement of financial position

Question 2

The importance of liquidity:

Answer 2

• Cash is essential to short-term survival of the business. If it cannot pay its running costs, the company can be placed into administration.
• It could affect the level of dividends
• It may indicate whether the company can afford future expansion

Question 3

LIMITATIONS OF STATEMENTS OF CASH FLOWS

Answer 3

• Shareholders also need to use income statements (to assess profitability) and statements of financial position (to assess liquidity and gearing)
• Like other financial statements, they are historical and do not always indicate what will happen in the future.
• Like other financial statements, many items are summarised and do not provide detailed information.