Financial statements, ratios, cash flows, financial analysis
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1. Why are companies required to prepare a statement of cash flows? Why is the statement of cash flows divided into three sections? What does each section tell you about a company's operations?
2. What are some common ratios used to analyze financial information? Which are the most important? What are some examples of how ratios are used in the decision-making process?
3. What are the differences between the direct and indirect presentation of cash flows? Why does the Financial Accounting Standards Board allow both methods? Which do you prefer? Why?
4. Two popular methods of financial statement analysis are horizontal analysis and vertical analysis. What are the differences between these two methods?
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Solution Summary
1. Why are companies required to prepare a statement of cash flows? Why is the statement of cash flows divided into three sections? What does each section tell you about a company's operations?
2. What are some common ratios used to analyze financial information? Which are the most important? What are some examples of how ratios are used in the decision-making process?
3. What are the differences between the direct and indirect presentation of cash flows? Why does the Financial Accounting Standards Board allow both methods? Which do you prefer? Why?
4. Two popular methods of financial statement analysis are horizontal analysis and vertical analysis. What are the differences between these two methods?
Solution Preview
1 - Companies are required to prepare a statement of cash flows because it shows investors and other users of the company's financial statements how money was handled during the accounting period. The actual differences in each of the areas is shown, and this shows investors exactly what management is doing with the money that the company is handling. Investors can then use the statement of cash flows to determine if management is handling cash properly. By analyzing each section, and in particular, the investing activities section, it gives a strong indication as to if management is doing things with the excess cash that will make additional money, like purchasing assets for expansion, or if the money is sitting in an account somewhere that is excess, and is therefore not really working "for" the company. The statement of cash flows is divided into three sections so that the activities within each section can be clearly defined and reported. It makes it a cleaner, more organized presentation to the user. The operating activities section shows the company's earnings in that period, and items like depreciation are added back in (because it's a non-cash expense), and the other appropriate adjustments are made to come down to the bottom line of this section, which shows the total net cash from operating activities. The investing activities tells the user how money was ...
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