Question

What do the cash flow statement show? What does this mean for the future viability
of the firm? How helpful is the analysis of ratios and cash flow statemenrt in understanding the company’s
performance?

Answer 1

What do the cash flow statement show?

Cash flow statement is very useful financial instrument for a company because this cash flow statement shows followings;

1. Sources of cash for a company

2. Uses of cash in the company

3. Fractional view of overall cash flows in the company like; from operating activities, financing activities and investing activities etc.

4. It helps in evaluating current cash position of the company.

5. It helps in short-term & long-term cash policy making etc.

What does this mean for the future viability of the firm?

Cash flow statement helps in future policy formation on the basis of present position of cash in the company hence management of the company can take worthy decisions which helps in making viable future for the firm & company. If management does not know correct existing cash position and correct flow of cash then it will not be possible to take perfect & appropiate decision. In other words we can say that management can not take viable decision for future time. Thus viability of decision regarding cash position, flow of cash depends on the actual figures & actual data about the cash position and cash flows etc.

How helpful is the analysis of ratios and cash flow statemenrt in understanding the company’s performance?

As we know that all types of stakeholders are not able to understand core financial satatements like Balance sheet and Income Statement. Hence it is necessary to provide them brief & summerized data about the performance of the company. Ratios are the solution for the needs of the stakeholder because these are brief & understandable and stakeholders can understand performance of the company easily. Thus ratios analysis is very useful.

Cash flow statement provides such information which are not supplied by Balance Sheet and Income Statement thus this statement is also very helpful for management and other stakeholders because income statement and balance sheet do not show actual data about cash position and cash flows thus we can not ignore importance of cash flow statement.

So overall we can say that ratos analysis and cash flow statement are very useful in understanding real performance of the company.