Question

• Discuss three ways the cash flow statement assists users.
• Explain what is meant by the statement “Cash is king.”

Answer 1

Cash flows statement provides movement of cash and cash equivalents. There are different ways the cash flows statement assists users

1. Profit is measurement stick for business performance, but the cash is a king of business, this expression referts to tell about the importance of cash, sufficiency of cash leads to the management decision regarding taking of loan to maintain minimum balance and repayment of loans. And also to calculate free cash flows of the business for smooth flow of business.

2. When there is an excess cash in business, management may take financing decision like reinvent in business for the growth of business, buying of new equipment for growing capacity of business. Investment in other business to expand scope.

3. Income statement alone doesn't tell about some cash flows, but cash flows statement helps to tell about evey cash flow in business, which helps you to know about where the cash went. Management may take decision regarding optimum utilisation of resources. Huge cash in business may leads to increase credit facilities to customer and promt payment to the suppliers.

As aforesaid, the cash is ultimate to tell about liquidity position (slovency position), so cash is important to maintain good health of business, even though business having good profit. Of course profit is base to generate cash flows, hence, the Cash is King.