Question

In: Accounting

Where in the cash flow statement would you find information to tell you if a company...

  1. Where in the cash flow statement would you find information to tell you if a company accesses capital markets (long term borrowing or issue stock) to raise cash?
  2. Some companies entered the crisis without big cash reserves and paid cash dividends to shareholders. Can the cash flow statement give you information to determine if a company in which you have an interest followed this practice? Briefly explain
  3. The article identifies a number of companies who will be able to weather this economic slowdown by cutting operating expenses. Where in the cash flow statement will the effects of such cost cutting be revealed? How will reducing expenses or cutting back on capital expenditures affect a company’s free cash flow?

Solutions

Expert Solution

Where in the cash flow statement would you find information to tell you if a company accesses capital markets (long term borrowing or issue stock) to raise cash?

Financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from issue of equity shares, debentures, raising long-term bank loans, repayment of bank loan, etc. Financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in case of a company) and borrowings of the enterprise. Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds ( both capital and borrowings ) to the enterprise. Examples of financing activities are:

Cash Inflows from financing activities

Cash proceeds from issuing shares (equity or/and preference).

Cash proceeds from issuing debentures, loans, bonds and other short/ long-term borrowings.

Cash repayments of amounts borrowed.

Interest paid on debentures and long-term loans and advances.

Dividends paid on equity and preference capital.

It is important to mention here that a transaction may include cash flows that are classified differently. For example, when the instalment paid in respect of a fixed asset acquired on deferred payment basis includes both interest and loan, the interest element is classified under financing activities and the loan element is classified under investing activitiy.

Some companies entered the crisis without big cash reserves and paid cash dividends to shareholders. Can the cash flow statement give you information to determine if a company in which you have an interest followed this practice? Briefly explain

Cash flow statement shows the opening value of cash and cash equivalents as well as closing value of cash and cash equivalents. It also shows the cash outflows for financing activities including but not limited to dividend and interest paid.

Hence, based on cash flows statements, we can judge which compant entered crisis without big cash reserves and paid cash dividends to shareholders.

The article identifies a number of companies who will be able to weather this economic slowdown by cutting operating expenses. Where in the cash flow statement will the effects of such cost cutting be revealed? How will reducing expenses or cutting back on capital expenditures affect a company’s free cash flow?

Operating expenses reduction will be shown and reflected as an increase in the cash flow from operating activities. Reduction in expenses and cost cutting will increase the cash flow from operations. Cutting back on capital expenditures will also decrease the amount of cash outflow in the investing activities. Combined effect of these will be and increse in operating cash flows with a decrease in outflows for investing activities, resulting in an increased Free cash flows.


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