Read the following discussion and give response: 1. In general, to assess a companys financial condition an
Question:
Read the following discussion and give response:
1. In general, to assess a company’s financial condition an analysis of cash flow data should be conducted in order to study the relationships among cash flows from operating, investing, and financing activities, to include computations of financial ratios in respect to the data. A company or a particular product/service (offering) growth stage will be a period in its life cycle where it is heading in the direction of a strategic business plan and/or goal. A point in a company or offering’s life cycle can be better viewed from the statement of cash flows as opposed to the company balance sheet or the income statement. The cash flow statement is not prepared using the accrual method but rather it is representative of the actual inflows and outflows of cash for a given period and can be utilized as a means of following the company or offering as it passes through typical life cycle stages; introductory, growth, maturity, and decline.
The transition from growth stage to cash cow will be reflected in the statement of cash flows following the period of time that the company or company offering moved through the growth stage where outlays were necessary to support the increased inventory, supplies, housing, advertising, promotional activities, granting of credit, etc., creating significant cash requirements, and moved into the mature phase. During this period (mature phase) the company or its offering can be referred to as having entered the cash cow stage, whereby the company or product/service is producing cash flow without needing the higher cash outlays that were previously necessary for growth. This will be evident in the cash flow statement as increased operating cash inflow with a decrease in outflow for the activities that had earlier supported the introduction and growth needs when entering the market.
2. The decline of the cash cow will be reflected in the statement of cash flows as the cash from operations, in respect to the company or company offering, is decreasing due to decreased sales/inflows. The company or product/service appears to be entering the decline phase in the business life cycle as this occurs. For the most part, at this point the company may have received all or the majority of the cash that could be obtained from the cash cow and decided to use this cash to launch or purchase other businesses or products/services that could then provide higher growth and begin the cycle. Companies may also decide to use strategies to prolong the mature phase (delay the decline) by updating, promoting new ideas or uses, entering other markets, or expanding globally where there may be customer demand, etc., but depending on the action taken may increase the cash outlays.
Accounting concepts and applications
ISBN: 978-0538745482
11th Edition
Authors: Albrecht Stice, Stice Swain