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Cash flow statements

Cash flow statement is one of most important financial statement used by any business

that tells the company about the cash inflows and outflows all three financial statements are

intertwined with each other cash flows start from the net income use net income as a input there

are two methods for preparing cash flow statement one is direct method other one is indirect

method and involves cash inflows and cash outflows from three types of activities operating

activities convert the item on the income statement expenses state as cash outflows whereas the

sale is cash inflow operating activities all take on the increase and decrease in inventory ,

account receivables , account payable second one is investing activities which records all the

activities related to the sales and purchase of the assets including all equipments and plant all the

cost of borrowing , issuance and purchase of stock , dividend paid comes under financing

activates. The direct method of cash flow statements merely takes the activities responsible for

generating revenue as cash inflows and activities for incurring expenses as cash outflows but in

indirect method has the complete list of factors cause change in outflows and inflows that are

account payables, account receivables and inventories.

How useful is cash flow statement for making an investment?

The cash flow statements are very much like the company check book register by looking

at the cash flow statement one can easily know the movement and mobilization of the cash in the

company means what activities are generating cash and what consuming cash well looking at the

cash flow investor can put a lens of awareness to get insights about the company cash

management through operation which directly ties with the items of balance sheet means if there
is an increase in the account receivables and a decrease in account payables has what effect on

cash flow all the investment made by the company investor can easily grasp by looking into the

investing activities. The one of most important life line of business health is financing activities

which shows how much companies have borrowed and how much stocks have been issue in case

of public traded companies this account also reflects into the balance sheet account of equity in

short with the help of the cash flow statement one can easily know the financial health and worth

of the business

Vertical and Horizontal Analysis

Vertical and horizontal analysis both takes on different approaches vertical analysis

usually states in percentage number of total assets all the assets will be stated as in percentages

of total asset let suppose total assets are 10000 and inventory is 2500 here inventory is 25% of

total assets and the same procedure will down to the last total assets in income we can make a

sales a base for percentages let suppose sale is 15000 and cost of goods sold is 5000 here cost of

goods sold will be stated as 30 in vertical analysis we first make and select the main account like

in balance sheet major accounts are total assets , total liabilities and total stock holder equity in

which 100% will be allocated to total assets and other 100% will be divided among total

liabilities and stockholder equity on the basis of the their amount it is so because assets=

liabilities + equity .Horizontal analysis is said to be the trend analysis in which ratios are used to

compare the financial statements and use for an analysis of the growth of the company against

the industry and its competitors