Incorporate data, inferences, and reasoning to analyze different methodologies for creating cash...

Question:

Incorporate data, inferences, and reasoning to analyze different methodologies for creating cash flow statements.

You have been assigned to a team responsible for evaluating the company results based on the statement of cash flows. One of your responsibilities is to determine how much cash should be kept on hand. On the statement of cash flows your team has identified the following issues:

Operating activities did not generate a positive cash flow

Cash was generated primarily from the sale of plant assets

Additional shares of the stock were sold during the year

No loans were taken out during the year, and a substantial portion of the debt was retired

A. Why is it important for a company to generate cash from operating the statement of cash flows?

B. What might a trend toward providing cash through investing activities suggest about a business?

C. What factors might influence how much cash should be kept on hand?

Cash flow statement:

The cash flow statement is a part of financial statements that shows the inflow and outflow of cash and it shows how efficiently a company manages its cash flow. cash flow is divided into three parts i.e., operating activity, investing activity and financing activity.

Answer and Explanation:

A. Operating activities consist of those functions of a business organization which are directly related to its core operations. The majority cash flow of a company is generated from operating activities . for example cash receipts from the sale of goods and services. Cash flow generated from Operating activity must be positive because it shows the amount generated from core business operations and indicates that how much a company is earning from its ongoing business activities and is not creating cash flow from selling its assets or from increasing the debt of the company.

When cash flow from the operating activity is positive then it attracts more investors and the existing investors will keep their trust in the company.

B. Investing activities consist cash inflows and outflows generated from sale and purchase of the assets and investments of the company and not from the core working of a company, if a company is selling its assets to generate its cash flow then that shows the company is not performing well in its working and could not generate cash flow from its operating activities, this kind of trend will decrease the trust of the investors in the company.

C. The cash holdings of a company depends on its working capital if a company need more cash for its day to day business activities then it has to maintain a huge amount of working capital but if a company could survive for a long time with minimum cash in hand or at bank then it could maintain less amount of working capital and hence will need less cash and cash equivalents.


Learn more about this topic:

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Using the Statement of Cash Flows for Decision Making

from Accounting 101: Financial Accounting

Chapter 12 / Lesson 5
8.6K

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