Question

There are 4 Basic Financial Statements: Income Statement, Balance Sheet, Statement of Changes in Stockholders/Owner’s Equity, and Statement of Cash Flows. The Statement of Cash Flows typically receives the least amount of attention in Accounting textbooks. Further, the news typically focuses on ‘Net Income’ and ‘Quarterly Earnings.’ Also, reference is also made to items on the Balance Sheet. For example, technology companies can be a risky investment because despite their high earnings, there may be very little in the way of tangible assets supporting their business. The Statement of Changes in Stockholder’s Equity really reports only the change in ‘book value’ of the company. A company may have total Stockholder’s Equity of $50 million and 500,000 shares outstanding. The book value of the share is $100 but the stock may be trading in the market anywhere from $85 to $120 per share. Is it wrong to report the stock at book value? What can people learn about stewardship from the Statement of Cash Flows? What insights does it provide that people can’t learn from the other 3 Financial Statements? What are your thoughts on this from a Christian perspective?

Answer 1

1) Stocks of the company always presented at the Book value but to know its actual intrinsic value we have to value all assets and liabilities at its Fair Value for decision mmaking purpose.It's not wrong to report stock at Book value unless and untill it is required by law to report at Fair value/Market value.However all assets and liablities as per IFRS are now reported at fair value and hence it can be calculated by taking net asset methods.

2) The purpose of the cash flow statement is to show where an entities cash is being generated (cash inflows), and where its cash is being spent (cash outflows), over a specific period of time (usually quarterly and annually). It is important for analyzing the liquidity and long term solvency of a company.

The cash flow statement uses cash basis accounting instead of accrual basis accounting which is used for the balance sheet and income statement by most companies. This is important because a company may accrue accounting revenues but may not actually receive the cash. This could produce profits and taxes payable but not provide the resources to stay solvent.

3) Additional insights Cash flow provide:-

(a) Ascertaining Liquidity and Profitability Positions:

Cash Flow Statement helps the management to ascertain the liquidity and profitability position of a firm. Liquidity means one’s ability to pay the obligation as soon as it becomes due. Since Cash Flow Statement presents the cash position of a firm at the time of making payment it directly helps to ascertain the liquidity position, the same is also applicable in case of profitability.

One can understand from Cash Flow Statement how efficiently the firm is paying its obligation in various forms of expense and liability. At the same time, as the cash earning capacity of a firm can be ascertained from this statement, profitability position depends also on cash earning capacity.

(b) Ascertaining Optimum Cash Balance:

Cash Flow Statement also helps to ascertain the optimum cash balance of a firm. If optimum cash balance can be determined, it is possible for a firm to ascertain the idle and/or excess and/or shortage of cash position. After ascertaining the cash position, the management can invest the surplus cash, if any, or borrow funds from outside sources accordingly to meet the cash deficit.

(c) Cash Management:

Proper management of cash is possible if Cash Flow Statement is properly prepared. The management can prepare an estimate about the various inflows of cash and outflows of cash so that it becomes very helpful for them to make plans for the future.

(d) Capital Budgeting Decisions:

Since capital budgeting relates to the decision of capital expenditure in various forms on a long-term basis, cash flow timing is very important for this purpose.

(e) Superiority over Accrual Basis of Accounting:

No doubt Cash Flow Statement or cash basis of accounting is more reliable or dependable than accrual basis of accounting—as a number of technical adjustments are made in the latter case. Cash flow accounting is free from such snags.

(f) Planning and Coordination:

Cash Flow Statement is prepared on an estimated basis meant for the successive/next year which helps the management to know how much funds are required for what purposes, how much cash is generated from internal sources, how much cash can be procured from outside the business. It also helps to prepare cash budgets. Thus, the management can prepare plans, coordinate various activities with the help of this statement.

(g) Movement of Cash:

A Cash Flow Statement presents the management the flows in and flows out of cash for various purposes on the basis of which future estimates can be prepared.

(h) Performance Appraisal:

By comparing the actual Cash Flow Statement with the projected Cash Flow Statements, the management can evaluate or appraise the performances regarding cash. If any unfavourable variance is found, the reason for such variation is located and rectified accordingly.

4) She is right and discussing about the Red Flags like..

Unsteady cash flow: Cash flow is a good sign of a healthy organization but it should be a flow, back and forth, up and down. A stockpile of cash can indicate that accounts are being settled, but there isn’t much new work coming in. Conversely, a shortage of cash could be indicative of under-billing for work by the company.

Reported earnings that are positive and growing but operating cash flow that’s declining