Analyzing Cash Flow

Relevance of Cash

  1. Cash, residual balance from cash inflows minus cash outflows
  2. Most liquid asset, offers both liquidity and flexibility

Statement of Cash Flow

  1. Liquidity, nearness to cash of assets and liabilities
  2. Solvency, ability to pay liabilities when they mature
  3. Financial flexibility, ability to react and adjust to opportunities and adversities

Reporting by Activities

  1. Operating activities, earning-related activities
  2. Investing activities, means of acquiring and disposing non-cash assets
  3. Financing activities, means of contributing, withdrawing, and servicing funds to support business activities

Constructing the Cash Flow Statement

  1. Indirect method, net income is adjusted for non-cash income items and accruals to yield cash flows from operations
  2. Direct method, adjusts each income item for its related accruals

Limitations in Cash Flow Reporting

  1. No seperate cash flows for extraordinary items or discontinued operations
  2. Interest and dividends received and interest paid are classified as operating cash flows.
  3. Income taxes are classified as operating cash flows



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