Question

a) List four insights that can be gained on a company’s financial position / performance from its cash flow statement.

b) Briefly explain the relationship and differences between the income statement and the cash flow statement.

c) Discuss whether accountants would be prepared to recognise something like an underground water supply as an asset on the company’s balance sheet.

Answer 1

Answer-

(a) The cash flow statement contains information on three categories of corporate activities: operations, investment, and financing. The operating segment shows you how much cash you got from purchases and services, and how much you spent to fund payrolls, retailer invoices, leases, fees, and utility bills. The focus of this segment is on regular business transactions. The Investment Segment deals with cash flows for capital spending (such as machinery and land transactions), as well as acquisitions and sales related to inventories and other assets. The Finance segment includes information on cash receipts from deposits, installment payments, and cash exchanges with business owners.
From showing these types of cash flows, the owner of a company can say at such a glimpse the causes for shifts in cash balances from one time to the next. If managed properly, the cash flow statement can allow the owner to prepare for future periods and recognize potential financial problems before they get out of control. For example, if cash flows from receivables are diminishing over time, a business owner will choose to reconsider his or her credit practices or increase reporting requirements. If large capital outflows are used to fund outdated infrastructure, it could be time to sell off those properties and develop cash reserves.

(b) As the name suggests, this is where you can find facts about the profits of a business. Beginning with the net sales (revenue) of the company, various expenses are deducted to four different revenue metrics.
Net income: equivalent revenue minus the cost of products sold and depreciation. Gross income will tell you how successful a business is making its goods.
Operating revenue: Gross income and fixed costs subtracted, such as rent, operating expenditures, and research and development.
Pre-tax revenue: pays for costs such as interest income and interest charged on loans, as well as deductions and deductions that have little to do with the main financial activities of the company.
Net income: Net income is equivalent to pre-tax income, minus all income taxes (current and deferred) paid by a corporation on its earnings. This is usually the best measure of the total performance of a business for a given period of time.

A cash flow statement informs you about the net flow of funds into and out of a business. The declaration is split into three sections: activities, expenditure, and funding.
First, the operation section displays the cash flow from the principal revenue activities of the firm. Unlike the statistics on the income statement, the cash balance statement excludes non-cash income, like depreciation.
Second, the investment segment covers the company's costs relating to the acquisition of new vehicles or facilities, as well as the acquisition of shares and other forms of finance that include cash exiting the company's accounts.
Third, the finance segment indicates adjustments in the interest, loans, or dividends of a corporation. For example, when a business collects funds as a result of debt issuance, this contributes to the funds that come in. Later, as the corporation issues contributions to the loan holders, the cash will be decreased.

(c) Groundwater should be considered a natural resource. The importance of an asset lies in its capacity to deliver services over time. The groundwater stock provides each supply and is subject to a number of factors influencing its consistency. Of course, the withdrawal and/or addition of water today will have an impact on the quantity and condition of stocks tomorrow, and it is important to include this intertemporal factor in the estimation of the valuation issue. Intertemporal problems are connected to both of these service flows, and understanding them is crucial in understanding the ultimate valuation problem.
The system introduced for the measurement of groundwater might just as well be called a system for assessing the economic benefits of groundwater. Knowledge derived from an analysis of the advantages of groundwater can be used in a maximum benefit-cost analysis of governmental measures or management decisions concerning the quantity and quality of ground water.