|Jordan company statement of cash flow|
|Net profit for the year||141, 000|
|Cash flow from operating activity|
|Gain from sale of investment||(8000)||(8000)|
|Cash flow from investing activity||(126,000)|
|Proceed from sale of investment||51,500|
|Total cash flow from investing||(74,500)|
|Cash flow from financing activity|
|Cash flow from investing||37,500|
|Cash and cash equivalent||0|
|Cash flow available at the end of the period||150,000|
|Jordan company statement of financial position|
|Property plant and equipment|
|Long term debt||102,000||337,000|
|Shareholders and equity|
|Total equity and liabilities||715,000|
Calculating total free cash flow
Net income + depreciation – Net working capital
141,000 + 54,000 – 90,000 = 105, 000
Managers and investors use financial statements to make decisions. Specifically, managers use financial statements to establish the financial health of a company. However, investors are interested in the financial statements to make investment decisions. Investors are interested in a company that shows financial health and will be profitable in the long run so that they can earn adequate returns for their investments.
Bose noted that a statement of financial position is a useful tool that is used for substantiation of different accounts (34). It helps managers to be able to confirm that the balance held in the accounting system reconcile with transaction recorded in the subsystems. Substantiation of the statement of financial position is important because it helps to drive regulatory reporting on a monthly and quarterly basis. The quarterly reports help management to be able to make strategic decisions regarding the firm. Ideally, it helps managers to understand how the business is performing in order to take appropriate actions where necessary. Balance sheet substantiation can help managers to understand how the company has been performing on a monthly or quarterly basis so that they can be able to make strategic decisions. Historically, substantiation of the balance sheet was done manually. However, modern technology has introduced software packages that are more efficient and can be automated to produce monthly and quarterly reports (Ramachandran 60). The availability of these reports is critical for companies with high volumes of accounts because it enhances transparency and reduces risk. Management obtains this information from financial statements through special reports in order to make decisions such as which operations are inefficient and, which employees should be laid off.
The statement of financial position contains relevant data for calculating financial ratios. Financial ratio analysis is one the most powerful tool used by both managers and investors to make strategic decisions. It identifies the profitability, liquidity and financial gearing of a company. Investors assess the financial risk of a company by computing the gearing ratios such as debt ratio to establish the possibility of a company going into liquidation. For instance, investors can calculate the debt ratio of Jordan Company to determine the financial risk associated with the enterprise. After calculating these ratios, an investor will be able to make his/her decision whether they will invest in the business or not.
Managers can use the statement of financial position to establish the ability of a company to meet its financial obligations (Tracy and Tracy 49). For instance, through the computation of current ratios and quick ratios, managers will be able to establish how efficiently to use credit finances in the internal operations of the company. Moreover, most statement of financial positions contains information from the previous year to enable investors to compare the performance of the enterprise.
A statement of cash flow establishes the cash available in the company. Specifically, it establishes the movement of cash into and out of the company over a given period. Looking at this information in the cash flow, managers can able to keep track of money available in the company so that they can be able to plan when to buy assets and pay for expenses. The information from the income statement and balance sheet can be used to show the net increase and decrease of cash in a given period. By preparing a statement of cash flow, managers can be able to tell whether a business is running out of money thus enabling them to plan. Jordan management can use the statement of cash flow to plan when the company will buy assets and whether it is running out of money. Moreover, it can help managers and investors to know whether the owner of the firm is taking too much money from the business. Since every transaction in and out of the business is recorded in the cash flow, managers will be able to advise the owner of the firm of the maximum cash they can withdraw without harming the financial liquidity of the company (Rajasekaran and Lalitha 919).
Managers can be able to establish the impact of operating activities on the company. For instance, managers will be able to see the impact of paying suppliers quickly or increasing the debtor’s collection period (Sarngadharan and Kumar 59). Jordan managers will be able to observe what happens to the cash flow of the company if they delay collecting money from the debtors. If the managers fail to collect receivables on time, there is a high probability the company will run out of money. Therefore, it is in the best interest of the company to increase the creditor’s collection period and reduces the debtor’s collection period to ensure the business does not run out of money to run its operations.
A statement of cash flow enables managers to establish whether the business will be able to repay long-term loans. The repayment of long-term debts depends on the cash availability in the business. Thus, managers will be able to plan how to settle a long-term loan before it falls due. If the business is not able to meet its obligation, the manager can be able to establish alternative ways of financing (Rao 21). Therefore, preparing a statement of the cash flow will help Jordan Company to be able to establish on time the likelihood that the business will run out of money. This will help managers to find alternative methods of financing. Moreover, Jordan managers will be able to establish when the company will run out of money after repaying its obligation. Sometimes, paying long-term loans can leave a business without money. However, when managers prepare a statement of cash flow, they can be able to negotiate with financiers to extend the repayment period. This will ensure that the business does not run out of money after repaying the loan.
Bose, D C. Fundamentals of financial management. New Delhi, India: PHI Learning Private Limited, 2010. Print.
Rajasekaran, V, and R Lalitha. Financial accounting. New Delhi: Dorling Kindersley, 2011. Print.
Ramachandran, Neelakantan. Financial accounting for management. New Delhi: Tata McGraw-Hill, 2008. Print.
Rao, M. V. Management Accounting. New Delhi: New Age, 2003. Print.
Sarngadharan, M, and Rajitha S. Kumar. Financial analysis for management decisions. New Delhi: PHI Learning Private Limited, 2011. Print.
Tracy, Tage C., and John A. Tracy. Cash flow for dummies. Hoboken, N.J: Wiley, 2012. Print.