Finance

Understanding Business Finance

Understanding Business Finance

This paper intends to examine the financial aspects of DB Associates. The main focus of the paper is on the Cash Flow Statement of DB Associates. Further, it also analyzes the business that I am currently involved with, which is Joe Fly by Night Oil Company. In addition to this, a comparison is made with the entirely different business structure, which is McDonalds.

Part 1: Cash Flow

Why is it important for DB Associates to construct a cash flow statement?

Cash flows are constructed on purely cash basis. Cash flows provide a good picture of the flow of cash outside and inside the organization, which certainly profit and loss fails to do. Cash flows have three major sections: Cash flow from operating activities, Cash flow from investing activities and Cash flow from financing activities. However, since the income statement and balance sheet are not given, so a plain cash flow statement has been constructed.

The reason DB Associates must construct a cash flow statement is that it must keep a record of its inflows and outflows of cash. In addition to this, since DB Associates ran the first two months of the business on credit, so in order to keep a track of funds Cash flow statements holds great significance in this aspect.

Further, it is important to make a cash flow statement in accordance of income statement and balance sheet by using the heads of operating activities, investing activities and financing activities. Operating activities comprise of all the cash transaction that are concerned with the operations of the business. The investment activities encompass all the transactions that are related to the purchases and sales of fixed assets. It considers all the transactions that are related to the “investment” in the business. The final part of the cash flow statement, the financing activity provides details of all the transactions that are concerned with financing of the organization. This includes issuance of shares and debentures, dividend payments, borrowing of loans and redemption of loans and debentures. However, DB Associates is a small business, so it does have and shares or debentures.

A Month by month cash flow forecast for the year 2013

Jan

Feb

Mar

April

May

June

July

Aug

Sept

Oct

Nov

Dec

Opening balance

100000

98000

96000

23750

1576

1602

8017

6793

7869

6745

2921

6773

Cash Sales

16250

8700

9300

18000

6950

7450

7950

9700

17750

11550

COGS

-86500

-3974

-4874

-7185

-4874

-3074

-5774

-8024

-8398

-10274

Overheads

-2000

-2000

-2000

-4400

-4400

-4400

-3300

-3300

-3300

-5500

-5500

-5500

New Equipment

-25000

 

Old Equipment

2500

 

Closing Balance

98000

96000

23750

1576

1602

8017

6793

7869

6745

2921

6773

2549

Part 2: Financial Statements

Discuss and Distinguish between a balance sheet and Profit and loss statement and how these would be useful to a business.

Analysis of the financial statements is done to find out the position of the company and its industry. Investors ask their respective brokers to do a thorough financial statement analysis of a company before investing in it. This is essential for the investor so that he knows whether if he is investing in a company which is safe and is working in an industry which will flourish. A company usually issues annual reports which are audited by the auditing firms, though historical transaction may not reflect the true value, but for that purpose firm keep revaluing their firms in order to maintain their market value (Zeitlow, 2007, ...