The cash flow statement is one of the four major accounting statements. “Cash is king” is...

The cash flow statement is one of the four major accounting statements. “Cash is king” is an age-old saying that is popular in business. The cash flow statement is a report, like the income statement and balance sheet, that firms use to explain changes in their cash balances over a period of time by identifying all of the sources and uses of cash for the period spanned by the statement. The focus of the cash flow statement is the change in the firm’s cash balance for the period of time covered by the statement (i.e., one year or one quarter). The cash flow statement uses information from the firm’s balance sheet and income statement to identify the net sources and uses of cash for a specific period of time.

Discuss three ways the cash flow statement assists users.
Explain what is meant by the statement “Cash is king.

Expert Solution

Three ways in which the cash flow statement will be assisting users are as follows-

A. It will be reflecting the liquidity position of the company and the ability of the company to discharge the debt in the short run.

B. It will also reflect the flexibility in the hands of the company and the ability of the company to invest in various projects and opportunities.

C. It will also reflect a better and sound position of the company and it will be resulting into a high amount of premium for the company while valuation,because cash will be easily realizable and there will not be any fluctuations.

When, it is said that the cash is King, it will mean that the cash is the ultimate asset as every asset will be having its value in cash,and cash generally is realizable and they do not have any discounting on the fair value because what is reflected in the cash will be realizable and hence any company who have a high amount of cash will be having a better solvency and liquidity position, and it will be attracting a premium in valuation and when the investors are also investing they will also looking for such companies who are sitting on a high amount of cash because it will offer them with a high opportunity to invest into various projects.

jeff jeffy answered 1 year ago

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