Answer To Tutorial 7 ToA

TUTORIAL 7
1. Search FASB ASC to find the discussion of statements of cash flows:

Required:
a. What is the stated objectives of the statements?
The purpose of cash flow statement is to disclose information related to the gross
receipts during the year and gross payment made by the company during the year
The cash flow will be reported in 3 parts :
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from financing activities
Besides that, amount of interest paid, dividend paid and income taxes paid will also
disclosed.
b. How should the information provided help investors and others?

The main functions of this statement are :
- to give overview of the company’s cash position
- to enable company to predict future cash needs and current cash usage and gains
- in case of analysis, intra firm and inter firm cash flows helps in analyzing the
liquidity position of a firm
- it helps in capital budgeting decisions, repayment of loans planning and
replacement of fixed assets, including any long term repayment of loans
- it helps investor in analyzing a company’s ability to pay dividend
- it gives investors insight of where their invested funds are used, what are the new
ventures company is into, and the profitability and growth of the company
- to shows the expenses and taxes incurred, taxes paid helps in analyzing whether
company is using funds properly and following tax compliances properly without
paying penalties to government.
- To analyze a company’s ability to repay its debts and future solvency of the
company
- To help creditors in analyzing the promptness of a company in making repayments
in making decision of giving credit to the company
2. The measurement of assets and liabilities on the balance sheet is often a secondary goal to
income determination. As a result, various measurement techniques are used to disclose
assets and liabilities.
Required:
Discuss the various measurement techniques used on the balance sheet to disclose assets
and liabilities.
There are 3 measurements techniques that are used on the balance sheet to disclose assets
and liabilities. The 3 techniques are fair value measurement, historical value cost
measurement and expected or future value cost measurement. Fair value measurement
indicates the price to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. This definition of fair value is based
on the term “exit price”. Historical cost measurement shows the original cost of an asset,
as it is carried on the books of a firm. It is important to know that historical cost
measurement does not being affected by the inflation and ignores the replacement cost of
the resources consumed. While future value measurement is based on the value of a current
asset at a specific date in the future and accounted using an assumed growth rate over time.
3. Preparing information on cash flows has become an important part of financial reporting.
Required:
a. What goals are attempted to be accomplished by the presentation of cash flow
information to investors?
Cash Flow Statement is a statement which shows the flow of cash in the organization
by differentiating into Operating activities, ,Financing Activities and Investing
Activities. By using Cash Flow statement, an investor can get information on how well
a company is managing its cash flow. And analyze a ,company's liquidity and
solvency by looking at ,how much cash received from financing activity was used for
operating or into making investment. Also information on how much the company is
recovering from the debtors. They will also be able to make comparison with other
organization of the same kind.
b. Discuss the following terms as they relate to the presentation cash flows information:
liquidity, solvency and financial flexibility.
The following are the terms that relate to the presentation of cash flow information :
i) Liquidity
As we are aware of, liquidity plays a crucial role in a company, when a
company has plenty of liquid assets it means that the company good liquidity
and they can convert their cash or liquid assets into cash quickly. If a company
invested in assets such as PPE, machinery , buildings which can’t be sold
immediately and will leave a company with little cash available. In this case,
company’s liquidity may be evaluated with the help of cash flow statement.
It measures how much money a company receive and spent over the accounting
period. It is measured in three parts which are income & expenses, loans and
other financing, investment and operations with the bottom line showing net
increase or decrease in cash flow. The whole system of cash flow statement
describes mainly the company’s core business is generating money or bringing
forth a loan.
ii) Solvency
Solvency indicates whether a company’s cash flow is sufficient to meet its
short term and long term liabilities. The lower a company solvency is the
greater its probability of default.The solvency ratio is only one of the metrics
used to determine whether a company can stay solvent. Solvency ratio
measures debt borrowing and other obligation such as short term and long term
debt.
iii) Financial flexibility

The term financial flexibility is used to describe a company’s ability to react
on unexpected expenses and investment opportunities. Companies which is
having strong financial flexibility are able to survive tough economic times as
well as take advantage of unexpected investment opportunities . Companies
that are unable to respond unforeseen setbacks may lack financial flexibility
and may not able to survive economic downturns.

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TUTORIAL 7

1. Search FASB ASC to find the discussion of statements of cash flows:

b. How should the information provided help investors and others?

iii) Financial flexibility

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