The objectives for week 4 include learning the importance of the statement of cash flow, the financial statements analysis, and how to master the fundamentals of both. The statement of cash flow is one of the main financial statements which investors rely on to measure a company’s financial strength. Some investors are very much interested in this statement because they absolutely want returns on their investment. The cash flow statement identifies the cash is flowing in and out of the company.
If a company is consistently generating more cash than it is using, the company will be able to increase its dividends, reduce debt, and acquire other businesses. All of this is perceived to be good for investors. Financial statements are prepared to meet internal and external reporting obligations, mainly for decision making purposes. Financial statement analysis is the process of identifying financial strengths and weaknesses of the company by establishing relationships between financial statements.
Such analysis shows changes between years in both dollar and percentage forms. Analyzing financial statements involves evaluating three characteristics: a company’s liquidity, profitability, and solvency. Short term creditors, such as a banks, are primarily interested in liquidity; the ability of the borrower to pay obligations when they come due. This is extremely important in evaluating whether the borrow can live up to the expectations of the loan agreement.
A long-term creditor, such as a bondholder, looks to profitability and solvency measures that indicate the company’s ability to survive over a long period of time. Long-term creditors consider such measures as the amount of debt in the company’s capital structure and its ability to meet interest payments. Similarly, stockholders look at the profitability and solvency of the company. They want to assess the likelihood of dividends and the growth potential of the stock.