Question

Green Mountain Ltd., a private company, has reported increasing profit every year for the past five years. Green Mountain would like to expand operations by adding three new retail stores within the next three years, and is seeking a loan from its bank to help fund the expansion. In Green Mountain’s most recent statement of financial position, the company reported a positive cash balance and a healthy current ratio of 2. Green Mountain’s controller believes that a statement of cash flows “would not be useful to the bank manager in making their decision because Green Mountain has a solid financial position and has had increasing profit every year for the past five years.”

Required: From the perspective of Green Mountain’s bank manager,

1. Discuss the importance of positive cash flows, and

2. Discuss the purpose and usefulness of the statement of cash flows.

Answer 1

?1. A positive cash flows is indicative of a healthy cash balance with the company and usually implies that the management of cash flows by the company is efficient.

2.Cash flow statement is a consolidated statement showing movement of cash i.e. cash inflows and cash outflows during a period by dividing these cash flows into three different categories: operating activities, financing activities and investing activities. The purpose of cash flow statement is to understand how cash is being generated and used during a period.