Question

Business owners monitor their cash flow for a number of reasons: to make sure their bills are paid on time, to ensure cash is received from customers, to determine if they have enough resources to expand, purchase new equipment, or even invest in other securities or companies. To evaluate their company's performance, they use the Cash Flow Statement, as well as the Horizontal, Vertical, and Ratio Analysis. These tools are beneficial in monitoring revenue and expenses, as well as measuring performance against competitors.

Instructions

Imagine you own a business. Your business could be anything from a coffee shop to a home-based healthcare facility, to an Accounting Firm. As the business owner, you are about to analyze the performance of your company and will need the information from your Cash Flow Statement, Horizontal Analysis and Vertical Analysis.

Questions

Please discuss the following information in a report:.

Briefly describe your business.

1. What information will you need to prepare the cash flow statement?

2. Which method will you use to prepare the cash flow statement? Why?

3. How can a Horizontal Analysis help you evaluate the performance of your company? Vertical Analysis? Which analysis do you think is more important or relevant as a business owner?

Now that you’ve analyzed your company’s performance, you want to expand your business and decide to apply for a small business loan. You have all the financial statements prepared and provide them to the loan officer. The loan officer reviews your paperwork and requests the calculation of three ratios: working capital, acid test ratio, and current ratio.

1. How do you calculate working capital, acid-test ratio, and current ratio?

2. Why do you think banks or creditors look at these three particular ratios?

3. Do you feel these ratios are important to monitor or are other ratios are just as important?

Please answer all of the questions, if you can not answer all of the questions do not reply.

Answer 1

What information will you need to prepare the cash flow statement
1	The income Statement
	This statement provides you teh information regarding the total revenue booked and the expenses incurred during the period.
2	Balance Sheet
	This statement gives us the information regarding assets and liabilities.
3	Comparative Balance Sheet
	Since we would look into the changes in the current period with respect to the earlier period, we would require the balance sheet for teh previous year as well for teh comparision.
Which method will you use to prepare the cash flow statement? Why?
	There are two ways of preparing the cash Flow statement
	1. Direct Method:
	The direct method sorts all of a company's transactions and summarizes them into categories akin to taking a bank statement and sorting out checks, type of bill paid and deposits by source of inflow.
	2. Indirect Method:
	Under the indirect method, the company starts with net income as reported on the income statement and adjusts net income on an accrual basis rather than cash basis
	Most companies opt to report the cash flow statement using the indirect method because accrual accounting provides a better measure of flows of business activity. In addition, the indirect method proves to be less complex for reporting purposes
How can a Horizontal Analysis help you evaluate the performance of your company
	Horizontal analysis
	Horizontal analysis focuses on trends and changes in financial statement items over time. Also, horizontal analysis can help a financial statement user to see relative changes over time and identify positive or the troubling trends.
	In tthe horizontal analysis approach, a base year is selected and the amount of each financial statement item in subsequent years is converted to a percentage of the base year amount
	Vertical Analysis
	Vertical analysis allows one to see the composition of each of the financial statements and determine if significant changes have occurred because all of the amounts for a given year are converted into percentages of a key financial statement component.
Which analysis do you think is more important or relevant as a business owner
	I think the horizantal analysis is more important to the business owner as in horizantal analysis you can spot trends in your financial data over time,.
	For a business owner, information about trends helps identify areas of wide divergence and once the ares are identified we can see if we require any further action for teh amendment or adopt any new strategies.
	While the Vertical analysis is the comparison of various line items within a single period, so it doesnot allow us to see the trend of teh business.
How do you calculate working capital, acid-test ratio, and current ratio
	Working Capital= Current Assets- Current Liabilities
	Acid Test Ratio= (Cash + Accounts Receivable + Short-term Investments) / Current Liabilities
	Current ratio = Current Assets/ Current Liabilities
Why do you think banks or creditors look at these three particular ratios
	Bank and Creditors look at theses ratis particulary because it reveals the liquidity position of the company and its ability to pay off teh debt . In other words, it tells you what would remain if a company took all its short-term resources and used them to pay off all its short-term liabilities
Do you feel these ratios are important to monitor or are other ratios are just as important
	Different ratios tells us teh different stories about the company. Above ratios mainly tells us the liquidity of the company while there are other ratios which gives us other information like return on the capital invested etc. So every ratio has its own importance to monitor.
Note-
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