Cash Flow Essay
Cash Flow A statement of cash flows is required by generally accepted accounting principles to be included in a complete set of financial statement. www.wiley.com Companies are required to prepare a statement of cash flow because it contains information for lenders and investors (external users). When a company uses the statement of cash flow it contains their annual reports that help to make decisions about the companies. The basis for cash flow analysis is presented in the statement of cash flow. It contains the actual cash a company generated and it shows how the company is able to operate and perform in the future. There are three ways a company shows the way they consume and produce cash. The cash flow statement has three sections. The three ways are cash flows from operations, investing and financing. How the company gets its cash is the operations and financing. The investing section shows the way the company spends its cash.
Ratios would be used in the decision making process. One of the examples of the ratios is the operating cash flow ratio. This measures how current liabilities are covered by the cash flow generated by a company operation. A ratio that falls below 1.00 shows the company is not generating enough cash to meet current commitments. When a company falls below 1.00, it will have to find ways to fund its operations or slow their rate of spending in its cash. If the company has an existing cash balance that can meet the needs, they would have to consider if the company will be able to continue to operate without additional funds, because the existing cash may not last. The cash current debt coverage ratio is another important ratio. This ratio measures the ability of a company to repay its current debts.
Ratios less than 1.00 in the cash current debt coverage, means the company is not generating cash to repay its current debt obligations. On a company balance sheet it is better to have a higher multiple calculated by this ratio. With the trend analysis, which is also called the horizontal analysis, typically over years, financial ratios are compared. Doing a year to year comparison will highlight trends, which will be useful in showing improvement in the organization financial performance or it will show deterioration. The most important information from analyzing statement cash flow is the relationship of two or more variables. This is the cash flow from operation activities to total cash flows.
RUNNING HEAD: CASH FLOW
The major difference between indirect and direct method is the information that it shows. The indirect method focuses on net income and cash flow of operations. It adds depreciation back and calculates changes in items in balance sheet. The most important line of the statement is the net cash from financing activities to show if a company continually needs to borrow or add other investors to survive. The direct method reports the classes of operating receipts of cash and payment. www.inc.com This would be money received and spent to calculate net cash. There is no depreciation included because it is not money received or spent.