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Week 7 Discussion: The Financials
Due Week 7 and worth 80 points
Important Notes
Use the “NAB Company Portfolio” (see: Course Required Files in Week 1) for reference. Provide the following information below.
The statement of cash flows is very important to investors because it shows how much actual cash a company has generated. Wiley & Sons state,
“The Three Elements of the Statement of Cash FlowsBecause companies can generate and use cash in several different ways, the statement of cash flows is separated into three sections: cash flows from operating activities, from investing activities, and from financing activities.
The cash flows from operating activities section shows how much cash the company generated from its core business, as opposed to peripheral activities such as investing or borrowing. Investors should look closely at how much cash a firm generates from its operating activities because it paints the best picture of how well the business is producing cash that will ultimately benefit shareholders.
The cash flows from investing activities section shows the amount of cash firms spent on investments. Investments are usually classified as either capital expenditures–money spent on items such as new equipment or anything else needed to keep the business running–or monetary investments such as the purchase or sale of money market funds.
The cash flows from financing activities section includes any activities involved in transactions with the company’s owners or debtors. For example, cash proceeds from new debt, or dividends paid to investors would be found in this section.
Free cash flow represents the amount of excess cash a company generated, which can be used to enrich shareholders or invest in new opportunities for the business without hurting the existing operations; thus, it’s considered “free”(Wiley & Sons, 2004, 2005, course 107).
Cash from Operations – Capital Expenditures = Free Cash Flow
Income statement. The most important financial statement for the majority of users is likely to be the income statement, since it reveals the ability of a business to generate a profit. Also, the information listed on the income statement is mostly in relatively current dollars, and so represents a reasonable degree of accuracy.
Balance sheet. The balance sheet is likely to be ranked third, since it does not reveal the results of operations, and some of the numbers listed in it may be based on historical costs, which renders the report less informative.
Statement of cash flows. A possible candidate for most important financial statement is the statement of cash flows, because it focuses solely on changes in cash inflows and outflows.
Bragg, S. (2014, March 15). Which financial statement if the most important? Retrieved from http://www.accountingtools.com/questions-and-answers/which-financial-statement-is-the-most-important.html
Wiley & Sons, (2004, 2005). Introductions to Financial Statements. Retrieved from http://news.morningstar.com/classroom2/course.asp?docId=142913&page=1&CN=sample
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