Question

List and describe two concepts that you feel were most important to you in this course. Why were these important to you?

Answer 1

Answer :- Two important concepts which are explained below are as follows :-

I). Cash flow statement & its importance :-

Cash flow statement explains cash movement of a business organization under the following three different heads namely :-

1). Cash flow from operating activities.

2). Cash flow from investing activities.

3). Cash flow from financing activities.

Sum of these three types of cash flow reflects net increase or decrease of cash and cash equivalents.

Cash flow statement shows three main categories of cash inflows and cash outflows, namely :-

Operating activities :- Operating activities are the principal revenue generating activities of a business enterprise.

Investing activities :- Investing activities include the acquisition and disposal of long-term assets and other investments but does not include cash equivalents.

Financing activities :- Financing activities are activities that result in change in the size and composition of the owner's capital (including preferred stock in case of the company) and borrowings of the business organization.

Importance of cash flow statement :- The cash flow statement is equally important as other financial statement (balance sheet, income statement etc.) due to following reasons :-

1). Cash flow statement helps to coordinate among management policies and financial conduction of the business so that proper cash is available for payment of liabilities.

2). Cash flow statement tells about the increase and decrease of cash amount with reasons thereto. It also informs that how the institution earns higher profit with less cash despite of more cash available.

3). Cash flow statement is helpful in financial planning of the business organization. Proper planning about managing the cash for future projects, interest, dividend etc. is possible with the use of cash flow statement.

4). Cash flow statement presents the statistical analysis of cash flows of past years which helps in the future estimation of sources and utilization of cash funds.

5). Cash flow statement controls the flow of cash while considering the future estimates of cash to be available and the actual leftover.

Order of preparing financial statements for business entity :-

(i). Income statement.

(ii). Statement of retained earnings.

(iii). Balance sheet.

(iv). Cash flow statement.

Cash flow statement is prepared in last (after preparing income statement, balance sheet etc.) because income statement, statement of retained earnings, balance sheet act as the basis of preparation of cash flow statement. In other words, numerical values of net income, retained earnings, assets, liabilities etc. are taken from income statement, statement of retained earnings, balance sheet etc. while preparing the cash flow statement for business organization.

II). Balanced scorecard :-

Balanced scorecard is a set of financial and non-financial measures relating to a company's critical success factors. It is an approach which provides information to management to assist in strategy implementation.

An ideal balanced scorecard combines financial measures of past performance with measures of the firm's drivers of future performance. The following perspectives are evaluated: -

(i) Customer perspective - Measures of price / quality / support / delivery etc.

(ii) Internal perspective - Measures of efficiency / sales penetration and new product introduction etc.

(iii) Innovation and learning perspective - Measures of technology / cost leadership / research and development etc.

(iv) Financial perspective - Sales / Cost of sales / Return on capital employed / Profitability performance etc.

It is very important for firms to understand the concept of balanced scorecard because it provides very useful information to the management of firms which will assist them in proper strategy implementation on timely basis. Balanced scorecard help firms to measures their past performance and compare it with firm's present and future performance.