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Session 7 & 8 self learning solutions (1).docx - Discussion...

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Discussion Questions1.What is a Cash Flow Statement? What is the main purpose of such a statement? A cashflow statement is a statement that presents the flow of cash to and from theorganization due to various transactions, during an accounting period. It separatelyshows the flow of cash under operating activities, investing activities and financingactivities.A cash flow statement serves a number of purposes:-Cash flow statement highlights the cash generated from operations.It helps to ascertain the liquidity position of the firm.It helps in effective and efficient management of cash.The management generally looks into cash flow statement to understand theinternally generated cash which is better utilized for payment of dividends.It helps in evaluating the cash position of the firm.2.Cash equivalents are short term, highly liquid investments that are readilyconvertible into known amounts of cash and which are subject to an insignificant riskof changes in value. Cash equivalents are held for the purpose of meeting short-termcash commitments rather than for investment or other purposes. For an investmentto qualify as a cash equivalent, it must be readily convertible to a known amount ofcash and be subject to an insignificant risk of changes in value. Therefore, aninvestment normally qualifies as a cash equivalent only when it has a short maturityof, say three months or less from the date of acquisition. Investments in shares areexcluded from cash equivalents unless they are, in substance, cash equivalents; forexample preference shares of a company acquired shortly before their redemptiondate (provided there is insignificant risk of failure of the company to repay theamount of maturity).3.Cash flow statement is very important to the investors, creditors and managementmainly due to the fact that it shows just how liquidity generating is the companythrough its operation. It helps to identify, in a timely manner, cash flow problems aswell as cash flow opportunities. It translates the earning reported on the incomestatement – which is subject to reporting regulations and accounting decisions – intoa simple summary of how much cash the company has generated during the periodin question. “Cash flow measures real money flowing into, or out of, a company’sbank account. It helps us to answer crucial questions such as the following:Is the company generating sufficient positive cash flows from its ongoingoperations to remain viable?Will the company be able to repay its debts?Will the company be able to pay its usual dividends?Why is there a difference between net income and net cash flow for the year?To what extent will the company have to borrow money in order to makeneeded investments?
4.The suggested response to the queries on SBI Cash flows at the start of the chapterare as follows :How can a company increase its cash balance and sit idle?

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Term
Spring
Professor
rajni bisht
Tags
Balance Sheet, Cash Flow Statement, Generally Accepted Accounting Principles

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