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    Cash flow honest statement? Restart growth? Ratio category?

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    Why is cash flow considered the most honest statement? Tell in your own words how a cash flow statement is created? Using Accounts Payable as an example, show how this account going up or down from year to year can affect cash flow.

    DQ 2 Set 1 - If you were looking at an existing small business to acquire, once you received this small business's current and past year's financial statements, what would be your next few steps?

    DQ 2, Set 2 - How do you continue or restart the growth cycle when your small business has already reached a plateau and began to decline? Provide an example of a business that was on the decline and made an adjustment to continue growth. What caused the company to go into decline in the first place and what adjustment did that company make to avoid further decline?

    List the major categories of ratios (you can find these in texts or via a internet search), then, using your own company, or a company for which you have worked in the past, pick what you believe is the one most important ratio (for said company) from each category. State the reason why these ratios are important for your chosen company.

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    Solution Preview

    Why is cash flow considered the most honest statement?

    It is difficult to "game" the cash flow statement like you can game the estimates used in computing earnings such as depreciation and warranty reserves. Cash was either paid or received. You do not "estimate" cash.

    Tell in your own words how a cash flow statement is created?

    Cash flow can be created from looking at all the cash transactions and sort them into the three categories. This works when there are just a few transactions. For large complex businesses, the cash flow statement is derived by examining changes in the balance sheet, income statement data, and details about sales and purchases.

    Using Accounts Payable as an example, show how this account going up or down from year to year can affect cash flow.

    Analysis of Accounts Payable Account:
    Beg .............................................$900
    ADD: Expenses accrued.................$25,000
    LESS: Payment made to vendors........$20,000
    End............................................$5,900

    In the above account, the net income would include the $25,000. The operating cash flows, however, would include the $20,000 ...

    Solution Summary

    Your tutorial is 725 words plus the financial statements of BP. The discussion gives examples and commentary in everyday language suitable for a novice. 15 ratios are presented in four categories and the reason for the most important in each of the categories is given.

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