Cash Flow

a.
1. Distinguish between the Financial Statements and Annual Reports
Financial statements are a record of all financial activities of a company and are prepared in a
structured manner so as to be easily understood by all, mainly the investors, shareholders and the
SEC. An annual report on the other hand contains much more than mere financial statements
though the basic purpose is to provide all relevant financial information about the company to all
stakeholders. Thus there are similarities in a financial statement and an annual report that
confuses many and they treat both as same which is wrong. This will explain the differences
between the two so as to remove all doubts from the minds of readers.
An annual report is like a result card of a student issued at the end of the year when he has taken
all examinations. It does include financial statements, the statement of income, profit and loss
account, statement of changes in equity as well as the statement of cash flows. But for an annual
report, these financial statements are mere numbers that reflect the financial health and the profit
or loss accruing to the company. Annual report has a broader scope and it includes a letter from
the CEO of the company, details about new products or services, plans for the future,
introduction of the directors and the management team. It is mandatory for public companies to
include information that is required by the SEC.
The difference in annual report and financial statements stems from the basic purpose they serve.
The basic objective of financial statements is to present in clear cut terms and numbers, financial
position, performance in the past and changes in financial positions of a company that are
necessary for shareholders and investors. These financial statements are transparent, easily
understood, and comparable to similar organizations. All assets, liabilities, profits and
expenditures must be easily accessible from these financial statements. The purpose of an annual
report on the other hand is to present a broader picture about the company than mere financial
numbers. It discusses products, new markets; strategies and direction that a company proposes to
take in future apart from all the financial data.
2. The Importance of Notes to the Financial Statements
Financial statement notes are the supplemental notes that are included with the published
financial statements of a company. The notes are used to explain the assumptions used to prepare
the numbers in the financial statements, as well as the accounting policies adopted by the
company. They help different types of users, such as financial analysts and investors, to interpret
all the numbers added in the financial statements.
When conducting an audit of the financial statements, the auditor conducts a thorough
investigation of all the information contained in the financial statements, including the notes to
the financial statements. Auditors use the notes to determine if the accounting policies used are
appropriate, properly applied, and are reflected in the reported results of the company.
The notes may also provide information on underlying issues relating to the overall financial
health of the company. The auditor bases his audit opinion on the financial statement numbers,
as well as the notes to the financial statements.
The notes are used to make important disclosures that explain the assumptions used to
prepare the financial statements of a company. Common notes to the financial statements
include accounting policies, depreciation of assets, inventory valuation, subsequent events,
etc.
b.
The concept of going concern is an underlying assumption in the preparation of financial

statements, hence it is assumed that the entity has neither the intention, nor the need, to liquidate
or curtail materially the scale of its operations. If management conclude that the entity has no
alternative but to liquidate or curtail materially the scale of its operations, the going concern
basis cannot be used and the financial statements must be prepared on a different basis (such as
the ‘break-up’ basis). A going concern is prepared to a business that is assumed will meet its
financial obligations when they fall due. If and when an entity's liquidation becomes imminent,
financial statements are prepared under the liquidation basis of accounting (Financial Accounting
Standards Board, 2014).
Comparability is the Qualitative characteristic that enables users to identify and

understand similarities in and differences among items. Information about a reporting entity is
more useful if it can be compared with similar information about other entities and with similar
information about other entities and with similar information about the same entity for another
period or date.
Comparable information enables comparisons within the entity and across entities. When
comparisons are made within the entity, information is compared from one accounting period to
another. For example: income is compared for the years 2014, 2015, and 2016. Comparability of
information across entities enables analysis of similarities and differences between different
companies. Corresponding information for preceding periods should be shown to enable
comparison over time. Comparability is prepared one of the enhancing qualitative characteristics
of useful financial information. Comparability allows users to compare financial position and
performance across time and across companies. Comparability is achieved by consistency.

c.
The cash flow statement is a financial report that records a company’s cash inflows and outflows
at a given time. It is one of the most essential elements in the financial management of a
company since it is an important indicator of the firm’s liquidity. To prepare a cash flow
statement, it is essential to have information on the company’s income and disbursements. This
information can be found in the company’s accounting records and it is important to order them
in such a way to be able to determine the balance for the period (generally one month), and to
estimate future cash flows. the importance of preparing a projected cash flow statement is that it
allows us to,
Anticipate future deficits (or lack of) cash, and hence make a financing decision beforehand
.Establish a solid base for requesting credit; for example, introduce it in our business plan or
project or management strategy. If we have accumulated positive balances in any period, part of
this balance can be invested in the capital market to generate an additional source of income.
This income is recorded as interest income in one of the income lines. It can also be invested in
technologies or equipment to improve the company’s management. The importance of the cash
flow statement is also that it allows us to rapidly know the company’s liquidity, delivering key
information that helps make the following decisions:
 How much input can we buy?

 Can we purchase in cash or is it necessary to request credit?
 Should we collect in cash or can we grant credit?
 Can we pay off debts when due or must we ask for refinancing?
 Can we invest the surplus of money in new financial instruments or projects?

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a.

1. Distinguish between the Financial Statements and Annual Reports

2. The Importance of Notes to the Financial Statements

The concept of going concern is an underlying assumption in the preparation of financial

Comparability is the Qualitative characteristic that enables users to identify and

 How much input can we buy?

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