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 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.

Thank you in advance for not copying other's answer.

Answer 1

I have downloaded "McDonald's Corporation 2019 Annual Report"

Below analysis in done on the cash flow statement is from the above corporations report.

1. Cash flow statement -

Cash flow statement contains the movement of cash in the financial year by the corporation. Company can make the cash flow statement by 2 methods

1. Direct Method

2. Indirect Method

The only difference these two method has is in the "Operating Activities"

Company has started with the Net income in the operating activities. Then as it is cash flow statement it should not have non cash items hence all the non cash gains or losses which are added or deducted has been removed from the net income.

After that as they followed indirect method to compute cash flow statement adjustment to changes in working capital has been done.

Increase in current assets has negative impact to the cash flow and decrease in current assets has positive impact to the cash flow statement.

Like wise for the current liabilities increases has positive impact on the cash flow and decreases has negative impact.

After generating Cash flow from operating activities. Which indicates cash which the company actually generated in the financial year. Negative cash from operating activities resulted company may decides to increase through borrowings and incase of goods positive cash flow from operating activities shows company will make investment to earn more profit through it.

McDonald's Corporation has very goods cash from operating activities balance which they have used part of it to invest in the capital expenditure and some part to repay debt.

Investing Activities -

Investing activities includes all the capital expenditure that company invest in and proceeds if the company sell those assets.

McDonald's Corporation has made huge investment in capital expenditure in the year 2019.

Financing Activities -

Financing activities includes dividend paid by the company, Borrowed funds if any and repayment of the funds, Issue of common stock and so on.

McDonald's Corporation has repaid long term debts due to good operating activities cash flow.

2. Method Used by McDonald's Corporation is "Indirect Method" the other method for computing cash flow statement is Direct Method.

Direct Method calculated directly by Cash Received from Customers, Cash Paid to Suppliers, Cash Paid to Employees, Cash Paid for Expenses and Taxes.

3. Cash Flow on Total Asset Ratio = Cash Flow from Operation / Average Total Assets

= $8,122.1/ ($47,510.8 + $32,811.2)/2

= $8,122.1/ $40,161

= $0.20

Management cash use this ratio to understand the flow of cash to the company from its operating activities. This help management to do forecast and prepare budgets for the future periods. Management can make predictions through this ratio about the future performance.