Assessing Organizational Liquidity
Interpret the components of a cash-flow statement to describe the liquidity of an organization.
The cash flow statement is crucial for assessing the liquidity of an organization, as it provides insights into how cash moves in and out of the business over a specific period. Here are the key components of a cash flow statement and how they contribute to understanding liquidity:
- Operating Activities:
- Description: This section shows cash flows from the primary activities of the business, such as sales of goods and services, and payments to suppliers and employees.
- Impact on Liquidity: Positive cash flows from operating activities indicate that the organization generates enough cash to fund its day-to-day operations and possibly invest in growth. Negative cash flows may suggest a need to improve efficiency or manage working capital more effectively.
- Investing Activities:
- Description: This section includes cash flows from buying and selling long-term assets, such as property, plant, and equipment, as well as investments in securities.
- Impact on Liquidity: Positive cash flows from investing activities typically indicate that the organization is able to generate cash from its investments or asset sales. Negative cash flows may reflect heavy investments in long-term assets or securities, which could affect short-term liquidity.
- Financing Activities:
- Description: Cash flows from financing activities include transactions with shareholders and creditors, such as issuing or repurchasing…
The cash flow statement is crucial for assessing the liquidity of an organization, as it provides insights into how cash moves in and out of the business over a specific period. Here are the key components of a cash flow statement and how they contribute to understanding liquidity:
- Operating Activities:
- Description: This section shows cash flows from the primary activities of the business, such as sales of goods and services, and payments to suppliers and employees.
- Impact on Liquidity: Positive cash flows from operating activities indicate that the organization generates enough cash to fund its day-to-day operations and possibly invest in growth. Negative cash flows may suggest a need to improve efficiency or manage working capital more effectively.
- Investing Activities:
- Description: This section includes cash flows from buying and selling long-term assets, such as property, plant, and equipment, as well as investments in securities. Assessing Organizational Liquidity
