Question

Corporations must disclose their financial reports to their stakeholders which should be publish in annual reports of the corporation. Download an annual report of any corporation in KSA and study the Cash flow statement prepared by them to answer the following questions:
1. Explain in detail how the cash flow statement was prepared by the corporation.
2. Which method was used to prepare the statement? Explain the other method that can be used to prepare cash flow statement, with numerical examples.
3. Calculate the corporations cashflow on total asset ratio and explain how this ration can help the management.

Answer 1

1. Most public companies use accrual accounting, which means the income statement is not the same as the company's cash position. The cash flow statement, though, is focused on cash accounting. Hence it is a analytical tool to analyse company's cash flow and Cash position.

A typical Cashflow statement includes-:
a. Cash flow from operations
b. Cash flow from investing activities
c. Cash flow from financing activities

Cash flow from operations-:

It includes transactions from all operational business activities. The cash flows from operations section begins with net income, then reconciles all noncash items ( example- depreciation) to cash items involving operational activities. So, in other words, it is the company's net income, but in a cash version.

This includes cash inflows and outflows that generates directly from a company's main business activities. For example buying and selling inventory and supplies, paying salaries. Any other forms of in and outflows such as investments, debts, and dividends are not included.

Cash flow from investing activities-

This includes the result of investment gains and losses. This also includes cash spent on property, plant, and equipment. This section is where analysts look to find changes in capital expenditures.

Cash flow from financing activities-:

It includes cash obtained or paid back from capital fund-raising efforts, such as equity or debt, is listed here, as are loans taken out or paid back.

It also includes dividend payments to shareholders and interest payments to loans and debentures

2. I have downloaded the Annual report of Microsoft Inc. and it's cashflow is prepared in indirect method.
And other methods is direct method which is explained below

The cash flow from financing and investing activities’ sections will be identical under both the indirect and direct method. The only difference is cash flow from operations. The direct method lists the cash receipts and cash payments made during the accounting period. The cash outflows are subtracted from the cash inflows to calculate the net cash flow from operating activities.

3. cashflow on total asset ratio( for the year 2019)=
Cash flow from operations / Total assets
=$52185/ $286556= 0.18211