Question

4. One tool of financial analysis to examine a firm’s performance is cash flow analysis. Explain the advantages of the cash flow analysis for company minimum 5 items.

Answer 1

Ans. Cash flow statement provides changes in cash and cash and equivalent for a given period , it classify the movement of cash into three parts or activities namely operating , financing and investing activities, advantages of cash flow for company are as follows-

i) Information obtained from cash flow used in assessing the ability of company to generate and dispose the cash flows

ii) When a company wants to take economic decision it has to access the cash position which is obtained from cash flow statement

iii) It helps in knowing the liquidity position of the company, means the actual cash position which is not available from profit and loss statement and others

iv) Liquidity is a different for every company and business, with cash flow statement necessary fund can be arranged to meet liquidity

v)It also provides the correct financial position in comparison of preceding year position, which saves the company from insolvency