Question

Accounting statements of cash flows: Looking at the accounting statement of cash flows, what does the bottom line number mean? How useful is this number for analyzing a company?

Answer 1

Bottom Line of Cash flow statement:

• The bottom line on the Cash Flow Statement is the Net Increase (Decrease) in Cash and Cash Equivalents. It's determined by calculating the total cash inflows and outflows for each of the three sections in the Cash Flow Statement. It has very significance value for analyzing a company's performance

Significance of Net increase(decrease) in cash and cash equivalents for analyzing a company:

• If there is net increase in the cash and cash equivalent it implies that company has earned cash more than it spent during the financial year which is a good sign indeed.
• If there is Net decrease in the cash and cash equivalent during the year, it shows that company has spent more than what it has earned during the year. It can be due to many reasons like operating activities were unable to generate sufficient cash to meet investing requirements, repayment of borrowings etc.
• Net increase(decrease) in cash helps to know the liquidity / actual cash position of the company which funds flow and P&L are unable to specify.
• As the liquidity position is known, any shortfalls can be arranged for or excess can be used for the growth of the business
• Any discrepancy in the financial reporting can be gauged through the cash flow statement by comparing the cash position of both the years.
• Cash is the basis of all financial operations. Therefore, a projected cash flow statement will enable the management to plan and control the financial operations properly.
• Net increase(decrease) in cash helps in internal financial management as it is useful in formulation of financial plans.