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Assuming that the Cash Flow from Operations is negative,does this necessarily mean that the company is not doing good ?
1. To provide information about the cash inflows and cash outflows from operating, financing and investing activities of the firm.
2. To show the impact of the operating, financing and investing activities on cash resources. 3. To tell how much cash came in during the period, how much cash went out and what the net cash flow was during the period. 4. To explain the causes for changes in cash balance. 5. To identify the financial needs and help in forecasting future cash flows
Firstly,the purpose of the cash flow statement is to inform about a company's gross receipts and gross payments for a specified period of time.
A consolidated CFS provides information about changes in cash and cash equivalents.
However,CFS standlone is not very useful.It must be analysed with the P/L and B/S.
Secondly,in the case of "Wicks n Sticks" ,thecompany's drive for rapid growth led to a dependence on the sale of new franchises to generate cash flow.This is a perfect example of rapid growth and subsequent bankruptcy.
Hence,it depends where the cash is coming from or going to.
Negative Cash flow does not necessarily mean that the company is doing good or vice -versa.
cash flow is a very important pillar in any business, without proper cash flow, you will have difficulties covering the operating expenses.
now, its important to look in categories of cash inflow and cash outflow to know if the negative net cash flow was due to fail in sales collection or it was due to acquiring new asset
To show the shortage or excess in cash for three company activities as the below to give chance to company management to mange and take the decision as cash flow negative (shortage) or positive (excess).1- Operational activity2- Finance Activity 3- Investement Activity
The consolidated statement of cash flows provides information about changes in cash and cash equivalents. Highly liquid investments with maturities of three months or less when acquired are classified as cash equivalents.
Well as the first part of the question is concerned, others have given ample information about what is Cash Flow Statement in context of Financial reports of a company. i will discuss the2nd part which relates to the operating cash flows.
Operating cash flows are composed of basically, Sales, cost of sales, depreciation, current assets and current liabilities. So "operating cash flows" if negative or positive are more likely to give the more correct picture of the business than the negive or postive "net cash flows". Because negative net cash flows may mean many things and does not necessarily mean that the company is in loss, while "negative operating cash flows" does mean that there is something terrible with the company, but still there are exceptions, i will discuss those exceptions later, but generally it means that sales are less than costs. which is alarming.
Exceptions would be that company paid long due vendors so much amount and the customer stopped paying and they owe so much that the net operating cash flows because of these two items become negative, and the other things are regular (meaning sales are more and cost of sales are less).
Well even on this exception, we can understand and enquire why customers have gone slow in paying, is there any quality issues with the product of the company, so again it is an alarming situation.
Statement of Cash Flows, IAS -7
Complementing the balance sheet and income statement, the cash flow, statement (CFS), a mandatory part of a company's financial reports since1987, records the amounts of cash and cash equivalents entering and leaving a company. The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent.
Cash flows are inflows and outflows of cash and cash equivalents. Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value
The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities.
Quality of earnings is usually mentioned when referring to earnings announcements and entity’s ability to convert earnings into cash.
Please for information’s; please refer to IAS -7 Statement of Cash Flow.
Cash flow from operating activites = EBIT + Depriciation - Taxes
EBIT = Earnings before Interest and Taxes
If earnings of a company from regular business activites such as production/selling of goods or providing services are showing negative cash flow means its expenses are more than its operating revenue. So it gives a bad impression to investors and notable thing for the owners/managers.
The purpose of the cash flow statement is to inform about a company's cash inflows and outflows related to its operating, investing and financing activities.
