¶ … rule-of-thumb in evaluating the cash flows of an organization is: The cash flows from operations should be positive, and increasing each year and ideally should be sufficient to cover any negative cash flows from investing activities.
How would you evaluate China Trade in terms of cash flows, in light of this rule-of-thumb measure?
The cash flow statements have Direct and Indirect methods of cash flow.
The Direct method reports the cash receipts and cash disbursements and deducts the latter from the former stating difference.
The Indirect method uses net-income as a starting point making adjustment for non-cash based and cash-based transactions.
Both methods here on their balance sheet show a $3,000 loss in operation activities. The rule of thumb heuristic is that cash flow from operation should be positive, increasing each year and ideally there should be sufficient cash flows s to cover any negative cash flows from investing activities.
China Trade shows no historical reports, therefore, these cash flows may well be decreasing (although this is only an assumption). Given this present records, there certainly seems to be insufficient money to cover any negative cash flows from investing activities. It is certainly not positive and this bodes ill for the organization.
2. China Trade's income statement (after adjusting for depreciation expense and adjusting entries) shows net income of $300. Yet, its cash flows from operations were a negative $3,000. What caused a $300 accrual basis profit to become a $3,000 "loss" in terms of cash flows from operations?
Note that there is an increase in Accounts Receivable.
Accounts Receivable also known as Debtors, is the money owed to a business by its clients
You’re 67% through this paper. Sign up to read the full paper.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.