An understanding of a firm’s cash flows is an integral part of each of the six...

An understanding of a firm’s cash flows is an integral part of each of the six steps in financial statement analysis. They are:

Identify the Economic Characteristics of a Business

Identify the Strategy of the Firm

Adjust the Financial Statements for Nonrecurring, Unusual Items

Analyze Profitability and Risk

Prepare Forecasted Financial Statements

Value the Firm

Discuss how the statement of cash flows integrates into the above six steps of analysis.

Expert Solution

An understanding of a firms cash flow is an integral part of each of the six steps in financial statement analysis. They are

Identy the economic characteristics of a business: cash flow helps to show the investors, stakeholders, employees and public about the economic position financial condition of a firm.

Identify the strategy of the firm: Cash flow helps to make investment portfolio of a firm. It helps to manage funds from external sources.

Adjust the financial statement for Nonrecurring, unusual items : Cash flow shows the actual inward and outward flow of cash from firm. It does not count deemed entries like depreciation, amortisation, etc

Analyze profitability and Risk: it shows the actual position of a firm. Through cash flow one can identify the firm is investing in a profitable business . firm can also do SWOT(Strength, Weakness, Opportunity, Threat) Analysis.

Prepare forecasted financial statements: on the basis of cash flow firm can also make forecasted financial statements for the succeeding years which can help for getting funds from Banks, Non banking financial institutions, etc.

Value the firm: cash flow shows the actual position of a firm by giving all the information retarding expenses and income. Through cash flow one can come to know the investment and market share of a firm.

ekkarill92 answered 2 years ago

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