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Cash Flow Analysis Purpose

Category: Financial Control Management

The uppermost goal of the Cash Flow Analysis is:

— Identification of the main sources of cash gains for a given accounting period;

— To reveal the main uses of cash;

— To reveal the causes of surpluses or shortages of cash and to determine inflow sources and how they are used.

The preferred method of Cash Flow Statement Analysis is the «Common-Size» Analysis, reporting all items to one of the following bases that represent 100%:

— Net Sales;

— Total Cash Inflows;

— Net Cash Flow.

The exorbitantly detailed Statement of Cash Flow leads to dispersion of the report and reduces the potential of analysis. The Statement should present enough information in order to highlight the main items that bring significance for further analysis. The minimum analyzed period that can reveal particular trends and produce meaningful conclusions should be not less than 5 — 7 years.

The key bunch of questions to be answered through the performed Cash Flow Analysis is:

— Has the enterprise been able to finance fixed asset replacement from internally generated cash?

— How has expansion been financed?

— To what extent is the enterprise dependent on outside financing? How frequently is it required, and what form does it take?

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