Cash flows statements (Coursework Sample)

T2 2021 Unit Code: HI5020 Unit Title: Corporate Accounting Individual Assignment: Cash flows statements Submission date: Name: Words Count: 3050 (excluding Abstract and References) Abstract Cash flow statements are becoming increasingly important among investors and lenders as a means of determining the financial strength of a company. Cash flow statements are a summary of the sources of cash and the uses of funds for each category in a business. The cash flow statement differs from the income statement in that the cash flow statement always complements the income statement and provides important information that is not otherwise available in the income statement. The sources and uses of funds are summarised in the cash flow statement under three main areas, which are operating, investing, and financing, respectively. The operating and finance sections of the cashflow statement would be of greater relevance to an equity investor or a bank lender. As a result, it is critical to comprehend the cash flow statement, including how and why it is relevant in the present context. Table of Contents TOC \o "1-3" \h \z \u Introduction PAGEREF _Toc82097698 \h 4Question 1 PAGEREF _Toc82097699 \h 4a) Preparation of cash flow statement PAGEREF _Toc82097700 \h 4b) Net income vs operating cash flow PAGEREF _Toc82097701 \h 6c) Negative operating cash flows affecting reliability of net income PAGEREF _Toc82097702 \h 6d) Potential employment position and influence on loan decision PAGEREF _Toc82097703 \h 7Question 2 PAGEREF _Toc82097704 \h 8Preparation of memo for the management of Polar Opposites PAGEREF _Toc82097705 \h 8Question 3 PAGEREF _Toc82097706 \h 10a) Cause of increase in receivable and its impact on net income and cash flow from operations PAGEREF _Toc82097707 \h 10b) Executive compensation and risk of earning management PAGEREF _Toc82097708 \h 11c) Trend of operating cash flows and other even, cause of concern PAGEREF _Toc82097709 \h 12d) Course of actions PAGEREF _Toc82097710 \h 13Conclusion PAGEREF _Toc82097711 \h 14References PAGEREF _Toc82097712 \h 15 Introduction The cash flow statement is divided into three primary components, each of which highlights the circulation of cash as of the current date for the company. These are the ones: * Operating cash flow: This metric depicts the sources and uses of funds generated by the company’s core activity (Farshadfar and Monem, 2013, p113(4)). * Financing cash flow: It depicts the sources and uses of funds as a result of the company’s capital structure choice (Duncan and Helmi, 2019, p13(1)). * Investing cash flow: Funds derived from sources other than operating and financing operations are represented by the term “investment cash flow” (Duncan and Helmi, 2019, p13(1)). Throughout this project, pupils have looked at a variety of different components of the cash flow statement, will learn about the different components of a cash flow statement, the difference between income and cash flow, how to evaluate a cash flow statement, as well as how to reconcile operational cash flow and net income. In this assignment, it has also been discussed how improperly structured managerial remuneration can have a negative impact on the health of a company’s bottom line. Question 1 a) Preparation of cash flow statement Statement of cash flow for Aggressive Corporation: Statement of Cash flow (Amount in $) Particular Details Details Amount Cash flow from operation: Net income   30000   Adjustment for - Depreciation 10000     Increase in receivable -60000     Increase in inventory -40000     Increase in accounts payable 20000     Increase in interest payable 10000     Net adjustment   -60000   Cash flow from operation     -30000         Cash flow from investing: Equipment   -100000   Cash flow from investing     -100000         Cash flow from financing: Note payable   100000   Common stock   40000   Cash flow from financing     140000         Net increase in cash     10000 Beginning cash balance     0 Ending cash balance     10000 According to the cash flow statement, the final cash flow balance is $10,000. The primary source of funds comes from the financing activities, whereas the cash flow from operations and investment is negatively correlated. b) Net income vs operating cash flow It is conceivable that a company’s net income is positive, but that the company has negative cash flow. This is due to the fact that income statements are generated using the accrual method of accounting, but cash flow statements are prepared using the cash movement method of accounting. Aggressive has a positive income of $10,000 but a negative operational cash flow of $-30,000 in the example shown. The following are the primary reasons: * Investment in a current asset: A total of $40,000 has been invested in inventory, with an additional $60,000 in accounts receivable. These are two current asset items that have not yet been converted into cash due to the fact that the cash conversion cycle may require significant period to accomplish. To put it another way, the full transaction is not in cash, and Aggressive has not yet received payment from its debtor. As a result, while estimating operational cash flow, these items are subtracted from net income before being included. * Non-cash item: Due to the fact that depreciation is a non-cash item, it will be adjusted to net income in order to arrive at a cash flow from operations. * Current liabilities change: The firm has seen a rise in current liabilities (interest due and account payable), which are obligations that have not yet been satisfied. To get at operational cash flow, the rise in current liabilities is adjusted to net income and the result is net income plus current liabilities. Positive adjustments for current assets are greater than negative adjustments for depreciation and current liabilities in the instance of Aggressive Corporation, resulting in negative cash flow for the company. c) Negative operating cash flows affecting reliability of net income When considering whether to invest or lend money, an investor or borrower will consider both net income and operating cash flow (Curley, 2008, p56(1)). The amount of cash created by a company’s primary operations is represented by its operating cash flow. When compared to net income, operating cash flows give a more accurate picture of a company’s ability to produce cash flow. If a company’s operational cash flows are negative, it will not be able to fulfil its debt and interest commitments on time. The company’s long-term viability and capacity to continue operations will be called into doubt. Negative operational cash flow is one of the early indicators that a company is on the verge of going out of business (Dalir Rezagholi Gheshlaghi, Ahmadzadeh and Faal, 2014, p15(11)). A company that has had persistent negative cash flow over a long period of time will not be able to exist and will be forced into financial difficulty. While it is not uncommon for a company to have a positive net income but a negative operating cash flow in the early stages of its existence, this attracts the attention of lenders who scrutinise the situation before making any financing decisions. It is an unsettling scenario when it comes to confidence in net income, and the company must take reasonable efforts to enhance operating cash flow. d) Potential employment position and influence on loan decision Following the disclosure of the information, it is apparent that Matt is not happy with the approval of an extra loan balance of $50,000 after experiencing negative cash flows. He also recalls a recent cash failure by another bank, which occurred as a result of the bank’s inability to generate positive cash flows. In order to have the loan authorised by Matt, the CEO has provided Matt with a statement on a future employment position. Larry is only attempting to persuade Matt to accept the loan deal by offering him the post of CFO. Larry has offered Matt something that might be described as a bribe in certain ways. The decision to provide the loan is influenced by the possibility of future work opportunities. That is why Matt needed an additional two weeks to respond to Larry’s email. The bank employee and loan approval officer Matt should maintain his independence while assessing loan applications and should adhere to professional ethics and a code of conduct when carrying out his job responsibilities. Such types of actions will result in financial fraud, which should be avoided at all costs and should be reported to the relevant government agency. Question 2 Preparation of memo for the management of Polar Opposites To, The management of Polar opposites Subject: Explanation behind negative operating cash flows and positive income. Background: Polar’s net income for the period ending December 31, 2018 was $5 million, but its operational cash flows were a negative $5 million as of December 2018. Polar has completed its first year of business. In this document, the attempt was to explain the circumstances that led to this scenario. The income statement and the statement of cash flow are two of the three fundamental financial statements. In the income statement, the specifics of the profit or loss made during the period are shown in detail. The cash flow statement displays the specifics of cash in and outflows depending on three different activities (Dalir Rezagholi Gheshlaghi, Ahmadzadeh and Faal, 2014, p15(5)). These are the activities: * Cash flows from operating * Cash flow ...