FA ASSIGNMENT

1. Reasons why cash flows are prepared and are important are:

 Insight into spending activities:

Using the cash flow statement, not only can keep track of
the payments that are included in the P and L account but
also of the payments that are not mentioned in the P and L
account. e.g. - A company taking a loan and paying it back

 Short term planning:

The company must have liquid fund in order to meet
various obligations that could arise shortly like paying debts
etc.

 Revealing the cash planning results:

It helps the company compare the past assessments’ cash
budget with that of the current budget to assess the cash
requirement of the company in the future.

 Long term planning:

 It reveals vital changes that are required for a company’s
financial positioning and helps the management prioritize
the business’s crucial activities and helps the management
make the long term planning of the cash.

 Working capital analysis:

Working capital is the component of the cash flow from the
operations that can influence the companies’ cash flow.
Thus, the investors should be aware of the company’s
working capital movement.
 Cash flow statement provides information of all activities
classified under operating, investing and financing activities.
The funds statement even when prepared on cash basis, did
not disclose cash flows from such activities separately. Thus,
cash flow statement is more useful than the funds
statement.

 A series of intra-firm and inter-firm cash flow statements

reveals whether the firm’s liquidity (short-term paying
capacity) is improving or deteriorating over a period of time
and in comparison to other firms over a given period of
time.