Cash Flow Analysis and Financial Position of Companies
What makeup accounting techniques could be used to handle cash flow statements, so that it shows a major/minor variation of the flows generated by defective entities?
While the result may be distorted by the effect of some income and expenditure, for example by increasing/decreasing amortization, impairment losses, etc., the defective flow generated by a magnitude of the company is totally objective. As much as the recognition and assessment of elements that make the defective flow, invoicing, and payments are unrelated to the effects induced by the different accounting policies used by the company, for the same transactions and economic events (accounting principles of the company do not affect the cash flow), which cannot be manipulated.
Depending on this data, which of the three companies presented a more balanced financial position?
- COMPANY A: Starting from a result of €5000, the company has been able to generate cash from operations of more than double the results, thanks to the positive effect adjustments (e.g., depreciation), especially as a result of the operations of capital flow. We are indicating that improved management of capital flow so that provided cash to the entity: reduced payment deadlines and extended payment. The amount of total cash flows generated by the operating activities, the company has assigned to all new investments, which are probably made with the intention of increasing or maintaining the capacity to generate future cash and financing (debt repayment), which has brought an end negative net balance -2,500 (cash consumption). If it is isolated from an exercise where the company is investing excess liquidity in new investment and debt cancellation, the Company need not present problems of liquidity in the short or long term. If you can continue to maintain this level in a generation of defective cash flow, you do not have to worry.
- COMPANY B Based on the same result as above, the company has only been able to generate cash from operating activities of €2,000. In this case, the current management of its capital has worsened, so that there was a deferral of cash of €5,000, with the result obtained. We observe that there was a perfect balance between operating, investment, and financing activities. All resources generated by activities aimed at new investments and to pay their financial debts, the same amount, which has seen that there is no net variation of the treasury.
- COMPANY C: Despite an increase in cash of €2,400, it is the company that has a more unfavorable situation. We are facing a company, being able to generate profits (positive result), has been unable to generate cash flow from operating activities. To cover the deficit caused by these activities, there is no need to resort to the sale of current assets and has been funded.
Operations Included in Cash Flow
- Units of credit in 6300 for furniture: Not part of the cash flow. It still does not affect an investment because funds have not been paying and therefore will be reflected in the cash flow of the year in which the payment occurs.
- Payment of interest earned in 2007 to 1280: Yes, that is part of the cash flow. Involves a payment out of funds, although the accrual was made in 2008.
- Loan Amortization received in 2005, 12,000: Yes, that is part of the cash flow. Implies a departure from funds produced by funding an operation.
- Capital increase under reservations made in 2009 for a total of 30,000: Under a capital increase in reservations will not be part of the cash flow since not result in any one entry of funds.
- Payment in 2009 of €4500 relating to machinery acquired in 2007: Yes, cash flow as part of an entry of funds from a divestment, although this produced in 2007.
- Sale of land in 2009 for €60,000, to be charged fully 2010: No part of the cash flow until it is filled, i.e. until 2010.