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Steven, M.Acc.
Steven, M.Acc., Instructor
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Why are companies required to prepare a statement of cash flows

Resolved Question:

Why are companies required to prepare a statement of cash flows?

Why is the statement of cash flows divided into three sections?

What are examples of how ratios would be used in the decision-making process?

How would you use trend analysis in the decision-making process?
Submitted: 4 years ago.
Category: Homework
Expert:  Steven, M.Acc. replied 4 years ago.
Companies are required to prepare a statement of cash flows (SCF) in their annual reports because it contains necessary information for external users, such as lenders and investors, who make economic decisions about the companies. It presents the sources and uses of cash and is a basis for cash flow analysis. Because it shows how much actual cash a company has generated, it presents if and how the company is able to pay for its operations and future growth.

Companies produce and consume cash in different ways, so the cash flow statement is divided into three sections: cash flows from operations, financing and investing. Basically, the sections on operations and financing show how the company gets its cash, while the investing section shows how the company spends its cash.

One important ratio is the operating cash flow ratio. It measures how well current liabilities are covered by the cash flow generated from a company's operations. If the ratio falls below 1.00, then the company is not generating enough cash to meet its current commitments. In this case, the company is likely to have to find other sources to fund its operations or slow the rate at which it is spending its cash. Any existing cash balance can help the company meet these needs, but there has to be some concern about whether or not the company will be able to continue operating without raising additional funds, as the existing cash balance cannot last indefinitely.

Another important ratio is the cash current debt coverage ratio, which measures a company's ability to repay its current debt. If a company's CCD ratio is less than 1.00, the company is not generating enough cash to repay its current debt obligations. The higher the multiple calculated by this ratio, the better you should feel when you see debt on a company's balance sheet.

In trend analysis, also called horizontal analysis, financial ratios are compared over time, typically in years. Year-to-year comparisons can highlight trends, useful in detecting improvement or deterioration in a organization's financial performance. The most significant information acquired from analyzing SCF data concerns the relationships between two or more variables, such as cash flows from operating activities to total cash flows.

By trend analyzing the SCF, it is possible to learn how effectively an organization has managed its cash flows over time. An organization that continually obtains most of its cash through operations demonstrates healthy and stable operations. An organization that continually obtains most of its cash through financing activities is in a riskier position.
Steven, M.Acc., Instructor
Category: Homework
Satisfied Customers: 740
Experience: Instructor and accountant. Master's degree in Accounting.
Steven, M.Acc. and 3 other Homework Specialists are ready to help you
Customer: replied 4 years ago.

WHAT ARE THE DIFFERENT TYPES OF STOCKS AND CORRESPONDING CHARACTERISTICS, WHICH A CORPORATION MAY ISSUE?

 

THANKS

Expert:  Steven, M.Acc. replied 4 years ago.
In issuing stock, a company’s board of directors first approves the maximum number of shares it wishes to issue (called authorized shares). This can later be changed by the existing shareholders. The company must then receive authorization from the state in which it exists, generally in the form of a certificate of incorporation or charter. Usually only some of those authorized shares are offered to the public (called issued shares). Those issued shares being held by stockholders (and not repurchased by the company itself) are called outstanding shares. (Those issued shares being held by the company itself are called treasury stock.)

Each share has a certain declared face value, commonly known as the par value. The par value is the minimum amount of money that a business may issue and sell shares for in many jurisdictions and it is the value represented as capital in the accounting of the business. Any amount received over the par value is called additional paid-in capital.

The stock that a corporation issues typically takes the form of common and preferred:

Common stock (or just stock) are shares of stock that give its stockholders the right to vote on various corporate matters, such as corporate policy, stock splits, and the election of members to the board of directors. Unlike preferred stock, however, common stock has no guarantee whatsoever when it comes to the distribution of dividends. Moreover, in the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders, and other creditors have been paid in full. The advantage to common shares is that they usually outperform bonds and preferred shares in the long run.

Preferred stock are shares of stock that give its stockholders a priority when it comes to the distribution of dividends and to payment upon liquidation of the company. The best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential increase in value). Preferred stock, however, usually carries no voting rights like common stock does. It is important to note that although preferred stock is senior to common stock, it is junior to corporate bonds. In other words, preferred stock has a priority to receive dividends over common stock, but corporate bonds have a higher priority over preferred stock. The price of preferred stock is tied to interest rate levels, and tends to go down if interest rates go up and vice versa.

Preferred stock is typically favored by private companies, which often want to separate stockholders' economic interest in the company and control of the business. Another reason that preferred stock is primarily an instrument of private companies is that stock exchanges and governing bodies tend to disfavor companies issuing publicly-traded preferred shares.
Steven, M.Acc., Instructor
Category: Homework
Satisfied Customers: 740
Experience: Instructor and accountant. Master's degree in Accounting.
Steven, M.Acc. and 3 other Homework Specialists are ready to help you
Customer: replied 4 years ago.

o What the liquidity, profitability, and solvency ratios tell you about the financial position of the company?

o Which users may be interested in each type of ratio?

o What the collected data tells you about the performance and position of the company?

Customer: replied 4 years ago.

Hey there!

I really like your answers, did u not liked this one? Embarassed

Expert:  Steven, M.Acc. replied 4 years ago.
Thank you. I appreciate your positive comments.

I'm sorry, but I was unavailable today. I will most likely answer your question by Noon tomorrow. =)
Customer: replied 4 years ago.

Thanks!!!

Expert:  Steven, M.Acc. replied 4 years ago.
In progress now....
Expert:  Steven, M.Acc. replied 4 years ago.
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Steven, M.Acc., Instructor
Category: Homework
Satisfied Customers: 740
Experience: Instructor and accountant. Master's degree in Accounting.
Steven, M.Acc. and 3 other Homework Specialists are ready to help you
Customer: replied 4 years ago.
Great answer thanks so much! Your answers are very easy to understand! Thanks again for a great answer!
Customer: replied 4 years ago.

JUST SO YOU KNOW!!!

 

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