Tag Archives: balance sheet
Cash flow analysis using the direct method is rarely used by companies. Knowing how to put together a cash flow statement using the direct method can be extremely useful, especially if you are looking for a thorough and more insightful analysis of the sources and uses of cash. Most companies, especially fortune 500 firms, prefer to use the indirect method due to the fact that it’s less time consuming and require fewer resources. Although both methods will provide a certain level of insight, the direct method is a bit more detailed in showing the inflows and outflows of cash for a particular reporting period.
Cash flow analysis is so crucial because cash is king to any business. When evaluating a company’s performance, most stakeholders, both internal and external, are interested in how well the company is generating cash. Having a strong grasp of cash flow analysis can give you great insights into the company’s past, present and future performance. There are a few types of cash flow analysis methods available and in a series of tutorials, we will explore the cash flow statement, cash flow ratios, discounted cash flow and free cash flow.
Understanding the relationship between financial statements enable you to manage business operations better. These relationships stem from the accounting information system and the way double-entry accounting is setup. The accounting cycle makes continuous utilization of this system to output four standard financial statements at the end of each accounting period. Those statements are :
(1) The Income Statement (2) Statement of Owner’s (Shareholder’s) Equity (3) The Balance Sheet (4) The Statement of Cash Flows
While each statement tells its own story, there are specific links and relationships between them that provide insights into the “bigger picture”. Moreover, a thorough comprehension of the relationship between financial statements will make you feel more confident about the information you are looking at and in your ability to analyze the numbers.