Question

ACC II - Financial Accounting, Ch. 12: Statement of Cash Flows Week 5

How can management use data from the cash flow statement to improve its management of cash?

As an investor, how will you use information from the cash flow statement?

How can management use the knowledge about the company's operating cycle and data from the cash flow statement to control cash?

Answer 1

Cash flow statement is an important tool for management to evaluate its financial performance and to see if the company has enough cash to pay for its bills. Income statement may show desired profits, but if the cash flow from operations is negative, it is an alarming situation for the company as it denotes the company does not have enough cash from its operating activities to pay for its day to day operations. A lower cash from operating activties means liquidity constraints and managers should reassess the inventory, the short term debt and the accounts receivables.

operating cycle is the number of days taken to convert material into cash. information about the operating cycle and data from cash flow statement of the cash flow from operating activties can be used to control cash. A negative cash flow from operating cycle would mean higher inventory, accounts receivbales and a decrease in the accounts payables. This will also increase the operating cycle. So when the management knows what is leading to an increase in the operating cycle, it can focus on that area like inventory and try to minimize it to improve operating cash flows.

As an investor, the most important part of the cash flow statement is again the cash flow from operating activities as it shows whether the company is generating cash from its operations or not. Also investor can use the cash flow from financing activties to assess the long term capital structure of the firm.