Question

“The Slater & Gordon case is proof that the Cash Flow Statements is the only part of the financial statement that provides an early warning sign of the company’s financial trouble.”

Required:

Do you agree or disagree with the statement above? Using the AREA framework, respond to this statement and give your reasons why. Cite examples to support your response.

ANALYSE: (30-50 words): Identify the issue and why it matters. Determine what you need to find out.

RESEARCH: (200-250 words): Present relevant facts and evidence, or issues.

EVALUATE & ANSWER: (200-250 words): Provide your opinion of the themes or issues you have identified, justified by the evidence you have gathered and evaluated.

Answer 1

SOLUTION:

Required-

I disagree because the purpose of the cash flow statements is to know exactly the amount of cash coming in and the amount of cash going out in a period irrespective of the revenues earned in the period and the expenses incurred in the period. Based on that information the company can analyse the excess of cash going out and the deficiency in the amount of cash coming in and plan accordingly.

Analyse-

The issue is that the cash flow statement has not provided an early warning of the company's financial trouble. To find out we need the complete cash flow statement, balance sheet and the Income statement as the to know the exact amounts of revenues, expenses, and the balance amounts to analyse the cash flow ststement and find deficiencies.

Research-

The fact that the cash flow statement shows only the amount of cash coming in and the amount of cash going out of the business in a particular period and it is not like the Income statement which shows the amount of expenses incurred in a particular period and the amount of expenses incurred in that period. It is also not like the Balance sheet which shows the balance in a particular account on a particular date. If we consider revenues, all the revenues from sales or services, need not be collected and some amount remains as receivables and some remains as bad debts, these receivables and bad debts effects only the Income statement and the Balance sheet but not the statement of cash flows as the statement of cash flows takes into consideration only the amount of revenues collected but not the collectables and the bad debts. The same is the case for all incomes and receivables. If we consider expenses, all the expenses incurred in the period need not be paid and some remains in payables like the salaries payable, rent payable, taxes payable, etc. The amounts in the Income statements represents the expense incurred irrespective of the fact that the expense is actually paid off. The expense which has not yet paid will go to the Balance sheet as payables. The cash flow statement considers the amount of expenses paid in the period irrespective of the amount incurred and the amount payable. If we consider assets purchased the Income statement does not contain the amount of asset purchased as it is a capital expenditure which gives a long term benefit. But the amount of cash paid for the asset is recorded in the expense side of the cash flow statement as the cash went out. So to analyse a cash flow statement we need to analyse the Income statement and Balance sheet to know the correct flow of cash and to find any deficiencies.  

Evaluate & Answer

Based on the relavent facts from the Income statement and the Balance sheet the analysis has to be made regarding the actual flow of cash and the amounts in the statement of cash flows and then analyse cash flows. Analyse expenses if paid earlier and Incomes which received late by which the company losses the interest benefit.