Evaluating Cash Flows from Operating Activities The operating… Evaluating Cash Flows from Operating ActivitiesThe operating activities section indicate

Evaluating Cash Flows from Operating Activities The operating… Evaluating Cash Flows from Operating ActivitiesThe operating activities section indicates how well a company is able to generate cash internally through its operations and management of current assets and current liabilities.Most analysts believe this is the most important section of the statement because, in the long run, operations are the only continuing source of cash. Investors will not invest in a com- pany if they believe cash generated from operations is inadequate to pay dividends or expand the company. Similarly, creditors will not lend money or extend credit if they believe cash generated from operations is insufficient to repay them.When evaluating the operating activities section of the statement of cash flows, consider the absolute amount of cash flow (is it positive or negative?), keeping in mind that operating cash flows have to be positive over the long run for a company to be successful. Also, look at the relationship between operating cash flows and net income.All other things being equal, when net income and operating cash flows are similar, there is a high likelihood that revenues are realized in cash and that expenses are associated with cash outflows. Any major deviations should be investigated. In some cases, a deviation may be nothing to worry about, but in others, it could be the first sign of big problems to come. Four potential causes of deviations to consider include:Seasonality. In some industries, seasonal variations in sales and inventory levels can cause the relationship between net income and cash flow from operations to fluctuate from one quarter to the next. Usually, this isn’t cause for alarm.The corporate life cycle (growth in sales). New companies often experience rapid sales growth. When sales are increasing, accounts receivable and inventory normally increase faster than the cash flows being collected from sales. This often causes operating cash flows to be lower than the related net income. This isn’t a big deal, provided the company can obtain cash from financing activities until operating activities begin to generate more positive cash flows.Changes in revenue and expense recognition. Most cases of fraudulent financial reporting involve aggressive revenue recognition (recording revenues before performance obligations are fulfilled) or delayed expense recognition (failing to report expenses when they are incurred). Both of these tactics cause net income to increase in the current period, making it seem as though the company has improved its performance. Neither of these tactics, though, affects cash flows from operating activities. As a result, if revenue and expense recognition policies are changed to boost net income, cash flow from operations will be significantly lower than net income, providing one of the first clues the financial statements might contain errors or fraud.Changes in working capital management. Working capital is a measure of the amount by which current assets exceed current liabilities. If a company’s current assets (such as accounts receivable and inventory) are allowed to grow out of control, its operating cash flows will decrease. More efficient management will have the opposite effect. To investigate this potential cause more closely, use the inventory and accounts receivable turnover ratios covered in Chapters 7 and 8.Evaluating Cash Flows from Investing ActivitiesAlthough it might seem counterintuitive at first, healthy companies tend to show negative cash flows in the investing section of the statement of cash flows. A negative total for this section means the company is spending more to acquire new long-term assets than it is taking in from selling its existing long-term assets. That’s normal for any healthy, growing company. In fact, if you see a positive total cash flow in the investing activities section, you should be concerned because it could mean the company is selling off its long-term assets just to gener- ate cash inflows. If a company sells off too many long-term assets, it may not have a sufficient base to continue running its business effectively, which would likely lead to further decline in the future.Evaluating Cash Flows from Financing ActivitiesUnlike the operating and investing activities sections, where a healthy company typically shows positive and negative cash flows, respectively, the financing activities section does not have an obvious expected direction for cash flows. For example, a healthy company thatis growing rapidly could need financing cash inflows to fund its expansion. In this case, the company could take out new loans or issue new shares, both of which would result in positive net cash flows from financing activities. Alternatively, a healthy company could use its cash resources to repay existing loans, pay dividends, or repurchase shares, all of which would result in negative net cash flows from financing activities. Thus, it’s not possible to evaluate the company’s financing cash flows by simply determining whether they are positive or negative on an overall basis. Rather, you will need to consider detailed line items within this section to assess the company’s overall financing strategy (is the company moving toward greater reliance on risky debt financing?) a. Does the company generate sufficient cash from the use of current assets and liabilities (or operating activities)?  b.What are its major sources (inflows) and uses (outflows) of cash during the period? c. Did the company’s cash balance increase or decrease during the period? How much? d. Based on the cash flows from three activities, is the company healthy overall? Why do you say so? Accounting Business Financial Accounting ACCOUNTING 221 Share QuestionEmailCopy link Comments (0)

An informal essay is a type of essay that is written in a casual and conversational tone. It’s often used to express personal opinions, experiences, and observations. Here are some steps you can follow to write an informal essay:

Choose a topic: The first step in writing an informal essay is to choose a topic that you are interested in. It can be about a personal experience, a hobby, a book or movie you enjoyed, or any other topic that you want to write about.

Brainstorm ideas: Once you have a topic in mind, brainstorm ideas and jot down notes on what you want to write about. Think about your personal experiences, opinions, and observations that relate to the topic.

Create an outline: Use your notes to create an outline for your essay. An informal essay doesn’t require a strict structure, but it should have an introduction, body paragraphs, and a conclusion.

Write the introduction: In the introduction, you should grab the reader’s attention and introduce your topic. You can start with a personal anecdote or a thought-provoking question.

Write the body paragraphs: The body paragraphs should expand on the topic you introduced in the introduction. Use examples, anecdotes, and personal experiences to support your ideas. You can also use quotes or references to support your argument.

Write the conclusion: In the conclusion, you should summarize your main points and restate your thesis statement. You can also offer some final thoughts on the topic.

Edit and revise: Once you have written your essay, take some time to edit and revise it. Check for grammar and spelling errors, and make sure your ideas flow logically.

Remember, an informal essay is a type of personal essay that allows you to express yourself in a casual and conversational tone. It’s important to write in a way that is authentic and reflects your personality.

Evaluating Cash Flows from Operating Activities The operating…          Evaluating Cash Flows from Operating ActivitiesThe operating activities section indicates how well a company is able to generate cash internally through its operations and management of current assets and current liabilities.Most analysts believe this is the most important section of the statement because, in the long run, operations are the only continuing source of cash. Investors will not invest in a com- pany if they believe cash generated from operations is inadequate to pay dividends or expand the company. Similarly, creditors will not lend money or extend credit if they believe cash generated from operations is insufficient to repay them.When evaluating the operating activities section of the statement of cash flows, consider the absolute amount of cash flow (is it positive or negative?), keeping in mind that operating cash flows have to be positive over the long run for a company to be successful. Also, look at the relationship between operating cash flows and net income.All other things being equal, when net income and operating cash flows are similar, there is a high likelihood that revenues are realized in cash and that expenses are associated with cash outflows. Any major deviations should be investigated. In some cases, a deviation may be nothing to worry about, but in others, it could be the first sign of big problems to come. Four potential causes of deviations to consider include:Seasonality. In some industries, seasonal variations in sales and inventory levels can cause the relationship between net income and cash flow from operations to fluctuate from one quarter to the next. Usually, this isn’t cause for alarm.The corporate life cycle (growth in sales). New companies often experience rapid sales growth. When sales are increasing, accounts receivable and inventory normally increase faster than the cash flows being collected from sales. This often causes operating cash flows to be lower than the related net income. This isn’t a big deal, provided the company can obtain cash from financing activities until operating activities begin to generate more positive cash flows.Changes in revenue and expense recognition. Most cases of fraudulent financial reporting involve aggressive revenue recognition (recording revenues before performance obligations are fulfilled) or delayed expense recognition (failing to report expenses when they are incurred). Both of these tactics cause net income to increase in the current period, making it seem as though the company has improved its performance. Neither of these tactics, though, affects cash flows from operating activities. As a result, if revenue and expense recognition policies are changed to boost net income, cash flow from operations will be significantly lower than net income, providing one of the first clues the financial statements might contain errors or fraud.Changes in working capital management. Working capital is a measure of the amount by which current assets exceed current liabilities. If a company’s current assets (such as accounts receivable and inventory) are allowed to grow out of control, its operating cash flows will decrease. More efficient management will have the opposite effect. To investigate this potential cause more closely, use the inventory and accounts receivable turnover ratios covered in Chapters 7 and 8.Evaluating Cash Flows from Investing ActivitiesAlthough it might seem counterintuitive at first, healthy companies tend to show negative cash flows in the investing section of the statement of cash flows. A negative total for this section means the company is spending more to acquire new long-term assets than it is taking in from selling its existing long-term assets. That’s normal for any healthy, growing company. In fact, if you see a positive total cash flow in the investing activities section, you should be concerned because it could mean the company is selling off its long-term assets just to gener- ate cash inflows. If a company sells off too many long-term assets, it may not have a sufficient base to continue running its business effectively, which would likely lead to further decline in the future.Evaluating Cash Flows from Financing ActivitiesUnlike the operating and investing activities sections, where a healthy company typically shows positive and negative cash flows, respectively, the financing activities section does not have an obvious expected direction for cash flows. For example, a healthy company thatis growing rapidly could need financing cash inflows to fund its expansion. In this case, the company could take out new loans or issue new shares, both of which would result in positive net cash flows from financing activities. Alternatively, a healthy company could use its cash resources to repay existing loans, pay dividends, or repurchase shares, all of which would result in negative net cash flows from financing activities. Thus, it’s not possible to evaluate the company’s financing cash flows by simply determining whether they are positive or negative on an overall basis. Rather, you will need to consider detailed line items within this section to assess the company’s overall financing strategy (is the company moving toward greater reliance on risky debt financing?) a. Does the company generate sufficient cash from the use of current assets and liabilities (or operating activities)?  b.What are its major sources (inflows) and uses (outflows) of cash during the period? c. Did the company’s cash balance increase or decrease during the period? How much? d. Based on the cash flows from three activities, is the company healthy overall? Why do you say so?                                                            Accounting                                                Business                                                Financial Accounting                            ACCOUNTING 221                                                                      Share QuestionEmailCopy link                              Comments (0)

Why Choose Us

  • 100% non-plagiarized Papers
  • 24/7 /365 Service Available
  • Affordable Prices
  • Any Paper, Urgency, and Subject
  • Will complete your papers in 6 hours
  • On-time Delivery
  • Money-back and Privacy guarantees
  • Unlimited Amendments upon request
  • Satisfaction guarantee

How it Works

  • Click on the “Place Your Order” tab at the top menu or “Order Now” icon at the bottom and a new page will appear with an order form to be filled.
  • Fill in your paper’s requirements in the "PAPER DETAILS" section.
  • Fill in your paper’s academic level, deadline, and the required number of pages from the drop-down menus.
  • Click “CREATE ACCOUNT & SIGN IN” to enter your registration details and get an account with us for record-keeping and then, click on “PROCEED TO CHECKOUT” at the bottom of the page.
  • From there, the payment sections will show, follow the guided payment process and your order will be available for our writing team to work on it.