1. Why are we interested in cash flows rather than accounting profits in determining the value of an asset?
because it is important than cash flows
For an entrepreneur, tracking cash is typically more important than tracking profits, especially in the early stages of a business. Cash flow ensures that the business can meet its immediate obligations, such as payroll and operational expenses, while profits can be influenced by accounting practices and may not reflect the actual financial health of the business. Without sufficient cash, even a profitable business can face critical challenges. Therefore, maintaining a positive cash flow is essential for sustainability and growth.
The statement of cash flows is a summary of the major cash receipts and cash payments for a period. This is important to a business to help them know where cash is going out to and where it is coming from and the amounts. This gives a more detailed account of cash in a company.
Cash flow statement means the cash inflow and outflow from business due to operating, financing and investing activities.
Some cash flows that are available to a stock investor include dividend payments and the cash flow that he can get upon the sale of the stock. Dividends are more suitable in the long run.
There are different cash flow patterns. Each cash flow should be discounted at a unique rate appropriate for the time period in which the cash flows will be received to get a more accurate bond price.
Depreciation is a non-cash adjustment and only appears in the statement of cash flows when transitioning between operating income and cash flow from operations. Depreciation is no more or less critical in a cash flow statement than any other adjustments for non-cash items.
The NPV (Net Present Value) of a long-term project is more sensitive to changes in the cost of capital because a significant portion of its cash flows occurs far into the future. Since NPV calculations discount future cash flows back to their present value, even small changes in the discount rate can have a substantial impact on the present value of those distant cash flows. As a result, if the cost of capital increases, the discounted value of future cash flows decreases more dramatically, leading to greater sensitivity in NPV. Thus, the longer the time horizon of cash flows, the more pronounced the effect of changes in the cost of capital on NPV.
A project with a negative initial cash flow(cash out flow),which is expected to followed by one or more future positive cash flows(cash inflows) is called conventional project.
following items are included in cash flow statement1 - cash flow from operating activities2 - cash flow from investing activities3 - cash flow from financing activities.
the advantage is that it focuses on the differences between net income and net cash flows from operating activities. Meaning, it makes it more useful to relate the statement of cash flows and the income statement and balance sheet. Also it is less costly to change net income to net cash flow from operating activities.
Cash flow analysis is the study of cash inflows and outflows from which activities company received how much cash inflows as well as how much cash outflows from business. If cash inflows more than cash outflows there will be more closing balance of cash then openening balance of cash.