Question

Discuss the structure of financial statements and how they interact with each other. Why is a cash flow statement considered an accurate indicator to evaluate a company? Locate financial statements for a company of your choice, and review the cash flow statement. What insights does it provides about the company’s performance, in relation to other its other financial statements?

Answer 1

A complete set of financial statement includes the following-:

a) Statement of financial position-: present assets and liabilities of entity at the closing date.

b) Statement of profit and loss account-: presents performance of the entity for the period

c) Cash flow Statement-: shows movement of cash during the year

c) Statement of changes in Equity-: Shows movement in shareholder's fund during the period.

d) Notes to accounts-: all notes, explanations and schedules are included in notes to accounts.

All the above are related to each other in financial statement. Without this complete set of financial statement, stakeholders can;t understand the operations of the Company fully.

Cash flow statement shows all the inflow ans outflow of cash during the year. Positive cash flow from operation is a good indicator for the Company. The investors see this as a good sign.

We have viewed annual report of Apple Inc to understand its cash flow statement.

i) We can see that cash flow operation is improved as compare to last year. Most of the other companies does not have positive or have loss cash flow from operation.

ii) Companies has invested so much in liquid instruments.

iii) The significant amount of cash flow is a/c buyback of own shares. Generally cash rich company purchase own stock from the market.

iv) There is very less component of borrowings in the Company. Most of the other companies have significant portion of borrowings in their capital employed.