Question

In: Economics

In year 1, a company makes xxx sales and xxx expenses. The end result is negative...

In year 1, a company makes xxx sales and xxx expenses. The end result is negative net income. In year 2, the company's sales and expenses are the same and thus still have negative income.

In year 1, the company sold its assets and reduced some current liabilities, resulting in positive cash flow in operating activities. Investing activities were marginally positive with an increase in ppe. Cash flow from financing activities was negative and the overall balance sheet changes as negative. In year 2, the company saw negative cash flows in operating and investing activities, but a positive cash flow in financing activities. The overall balance sheet changes were positive due to a substantial increase in finance activities.

Compared to year 1, how is the health of the company in Year 2?

Solutions

Expert Solution

Cash Flow:

Cash flows are the net cash flows and other similar cash equivalents that come and go outside of a company. The cash flow is generally recorded in the cash flow statement.

Net Income:

Net income is the final income that is in hand after meeting all the expenses, depreciation, taxes. Net income is recorded in the balance sheet.

Cash flow VS Net Income:

The net income is shown in the top of the cash flow statement through which the expenses are carried out by the company.

Coming to the comparison between the performance of the company, it can be observed that there was a negative cash flow during the first year and a positive cash flow in the second year. In the first year, the company had to sell its assets to maintain a steady flow in the operating activities. Whereas, in year 2, the company had a steady flow in financial activites thereby resulting in a positive balance sheet. The company's health in the year 2 is quite stable as the overall balance sheet picture has been improved. Financial activity flow is important to fuel through the functioning of the company for the year. The company must have received cash flows from any proceeds. By doing so, the investors will also have a positive impact on the company. However, the company is still in the brisk of going dry as the cash flow from operating and investing activities have gone negative.

In a nutshell, the company's health in year 2 as compared to year 1 is that, the company has recovered from the major threats but, not fully recovered to go back to its older life.

Rahul Sunny answered 1 year ago
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