Question

Explain why the statement of cash flows is necessary. Without going into detail on individual increases or decreases, explain generally how the other financial statements are used in determining the amounts to report in each section.

A bond’s price determined by the present value of its cash flows. Describe the cash flows used in the bond’s price calculation including what type of cash flow each is.

Answer 1

The Cash Flow Statement portrays how a company has spent its cash. It is often used in tandem with the other two key reports – the Profit and Loss and the Balance Sheet. It is the third component of a company’s financial statements.

The cash flow report is important because it informs the reader about the business cash position. For a business to be successful, it must have sufficient cash at all times. It needs cash to pay its expenses, to pay bank loans, to pay taxes and to purchase new assets. A cash flow report determines whether a business has enough cash to do exactly this. Having cash is a key requirement for a business to stay solvent. When a business has no longer enough cash to pay its dues, it is often declared bankrupt.

Link between components of income statement and cash flow statement: Expenses lead to cash outflow and Income lead to cash inflow. For eg., rent paid leads to expense outflow and dividend earned from stocks lead to cash inflow.

Link between components of balance sheet and cash flow statement: Decrease in liability and Increase in asstes lead to cash outflow and increase in liability and decrease in asstes lead to cash inflow

Bond's issuance lead to cash inflow, payment of interest on bond leads to cash outflow and tax benefit on payment of interest reduces cash outflow quantum.

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