Week 4 post 2 review minimum of 150 words apa format
Falsely preparing a statement of cash flows to obtain a bank loan is unethical. “Cash flow data is helpful in interpreting the borrower’s profitability, liquidity, management, and financial risk, thus enabling a lender to make an informed decision about whether to lend and how to structure the loan.” The statement of cash flows takes the accrual method and turns it into a cash basis. The cash basis will provide bank loan officers with a number of important items to make an informed decision. 1) To see the cash and cash equivalents available to repay the loan. 2) Analyze the inflows/outflows of cash to determine if money is being invested in equipment, plant, or property to increase sales which will increase cash (hopefully). 3) Is cash being used appropriately to purchase inventory which will increase cash or is inventory too high and sitting in the warehouse. 4) Does the company have enough cash/cash equivalents to pay other current debt? 5) What type of investing and/or financing does the company already have in place?
Banks need to scrutinize the operating, investing and financial cash flows to build a big picture of how solid the company’s is to determine whether or not to make a loan. If any of the information is misleading, the loan officers may make a decision that could cost the bank money by the company defaulting on the loan. The good news is that the loan officers have one advantage over investors, they have the right to directly ask company personnel questions about the statement of cash flows (as well as other financial statements) in order to dig deeper into the company’s financial position and hopefully get correct and accurate answers.
Emmanuel, C. B. (1988). Cash flow reporting, part 2: Importance of cash flow data in credit analysis. The Journal of Commercial Bank Lending, 70(10), 16. Retrieved from https://search.proquest.com/docview/209765893?accountid=35796
Mautz, R. D., & Angell, R. J. (2009). Reading the statement of cash flows.Commercial Lending Review, 15-20. Retrieved from https://search.proquest.com/docview/229570797?accountid=35796