Question

In: Accounting

Please provide detailed answer for each category. Do not copy paste. The statement of Cash Flows...

Please provide detailed answer for each category. Do not copy paste.

The statement of Cash Flows has three categories, Operating, Investing, and Financing. Write the importance of each category to a potential investor and why?

Solutions

Expert Solution

Cash from operating activities

This is the category which explains cash flow on account of core operations of the firm. It is relating to cash received from customers, payment to suppliers, and payment for expenses, interest and income tax. It is important due to

· It helps in understanding working capital movement due to current assets and liabilities.

· Potential investors can see how the firm is funding its working capital requirements. Firm can manage the operating cash flow through understanding movements in current assets and plan accordingly. For example if Accounts receivable is higher firm can negotiate with vendor for higher credit period days to manage working capital.

Cash flow from investing activities

This category is relating to purchase and sale of fixed assets and investments

· Potential investors can understand how Firm is investing in purchase of fixed assets based on the cash flow availability for future growth

· How firms is investing Surplus funds in investments to earn additional income

Cash flow from financing activities

This category is relating to financing activities of the firm that is borrowing and repayment of loans, raising capital, purchase and resale of treasury stocks and payment of dividend

· Helps in understanding borrowing and repayment of loans during the period.

· Helps in understanding the cash raised through issue of common shares and preferred shares during the year

· Helps in understanding whether surplus funds is deployed to purchase treasury stocks

· Helps in understanding the dividend payment of the firm during the year which potential investors see as return on investment


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