(solved) Financial Management: Assignment

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Course Name/Code: ECM 105 Financial ManagementAssignment Question:A) There are two principal methods of presenting cash flow from operating activities,the direct method and the indirect method. Describe these two methods in detail.B) Into which three categories are cash flows segregated on the statement of cashflows? Explain each in detail.C) What does each of the following categories of ratios attempts to measure? i)Liquidity ii) Long-term borrowing capacity iii) Profitability. List a group of users whomight be interested in each category and why?D) Usually, current assets are listed in a specific order, starting with cash, what is theobjective of this order listing?E) What are some of the implications and limitations of capital asset pricing model(CAPM)? Is there another model that can overcome some of the shortcomings of theCAPM?Attempt Count: 2
A) There are two principal methods of presenting cash flow from operating activities,the direct method and the indirect method. Describe these two methods in detail.Cash flows from operating activities consisting of amounts such as cash paid to suppliers andcash from customers, under the direct method. Cash flows available or used from operatingactivities are shown and the net effect of these flows on cash and cash equivalent items overthe period. Contrary to the direct method, under the indirect method, net income is shownfollowed by changes required to convert the total net income of the cash amount fromoperating activities. (Broome,2004) The net income from the statement of income is adjustedso that it is reconciled with the net cash flow from operating activities. It is presented asfollows:Net income + Depreciation – Change in assets + Change in liabilities. (Hackel &Livnat ,1992)The direct method should also provide a reconciliation of net income to cash generated fromoperating activities. This is done automatically under the indirect method. Several companiesprepare a cash flow statement using the indirect method.B) Into which three categories are cash flows segregated on the statement of cash flows?Explain each in detail.On the statement of cash flows, cash flows are separated into Operating activities, financingactivities and Investing activities. Each of these three classifications is described as follows.Operating activities are the normal day-to-day activities required to manage the project, suchas the sale of goods and services, collection of accounts receivable, purchase of inventory andpayment to suppliers, employees, taxes and other expenses and income in the statement ofincome because of operations. (Broome, 2004) These activities of the revenue generatingentity which are considered as an important indicator of the extent to which the entity cangenerate cash flows from its core operations sufficient to repay its loans and to maintainoperational capabilities.Investing activities are activities related to the granting, collection and sale of loans and thepurchase of fixed assets and intangible assets(Schmidgall, Geller & Ilvento, 1993)such as lands,buildings, equipment, cars etc.., and the sale or purchase of investments classified as cash
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