Response to Coments on DQ1 KS and DQ2 CH W9 - Essay Example

DQ1 You mentioned that the cash flow ment is used by creditors and lender to assess the economic situation of a business entity. I completely agree with you. The statement of cash flow is the best financial statements in terms of showing the liquidity of a company. The term liquidity in accounting refers to the ability of a company to generate cash to pay off its debt (Weygandt & Kieso & Kimmel, 2003). One of the best attributes of the statement of cash flow is that it divides the usage of cash into three categories of activities which are investing, operating, and financing.

Companies can always generate additional cash without the dependence of revenues by selling its common stock in the stock market. The cash that is obtained selling common stocks would be categorized as an investment activity in the statement of cash flow. Cash obtained from a loan are categorized as financing activities. DQ2 Cash and its evaluation in the statement of cash flow is very important because a company can generate revenues and positive net income, but if the firm does not have sufficient cash to pay off its debt the firm may run out of business.

A liquidity ratio that tests the ability of the firm to pay off its short term debt is the current ratio. A innovate way that managers can utilize the statement of cash flow is by applying vertical analysis. Vertical analysis reports the different amounts in the financial statement as a percentage of another item (Accountingcoach, 2011). For example the manager takes the different amounts of cash from each of the operating activities and divides it by the total cash balance at the end of the statement of cash flow.

The results of the vertical analysis can be compared to the previous year vertical analysis results. References Accountingcoach.com (2011). What is the difference between vertical analysis and horizontal analysis? Retrieved May 31, 2011 from http://blog.accountingcoach.com/vertical-analysis-horizontal-analysis/ Weygandt, J., Kieso, D., Kimmel, P. (2002). Accounting Principles (6th ed.). New York: John Wiley & Sons.