Question

The statement of cash flows.

Presenting information on cash flows has become an important part of financial reporting. Required :

a. What goals are attempted to be accomplished by the presentation of cash flow information to investors?

b. Discuss the following terms as they relate to the presentation of cash flow information:

1. Liquidity
2. Solvency
3. Financial flexibility

Answer 1

a)

The goals accomplished by the presentation of cash flows are:

1) It helps in evaluating of cash position

2)It helps in knowing the future cash position.

3)It helps in taking correct decision making.

4)It helps in long term financial planning.

5) The various classification into operating, financial and investing activity helps to understand the flow of cash in these classsification.

b)The meaning of terms in the context of presentation of cash flow statements:

I. Solvency:Solvency is a term that indicates the enterprise's ability to pay its obligations. The indicator reflects how many times the annual income is higher than the debts of an enterprise.It is the ability of the firm to meet long-term obligations and continue to run its current operations long into the future.

II. Liquidity: Liquidity refers to the ability of a company to pay off its short-term debts; that is, whether the current liabilities can be paid with the current assets on hand. Liquidity also measures how fast a company is able to covert its current assets into cash.It is a term that refers to the enterprise’s ability to repay its debts from generated cash funds.

III.Financial Flexibility: Financial flexibility refers to the capacity of a company to preserve its liquidity and supply cash against unexpected fluctuations that occur in an operational environment. In this sense, the capacity of the companies to access cash in case of unfavorable and tough market conditions is of critical importance in terms of facing bankruptcy risk. It has been observed that the companies that have financial flexibility prefer a prudent debt management policy with respect to their financial policies