RSM220H1 Chapter Notes - Chapter 5: Debt Service Coverage Ratio, Cash Flow, Historical Cost
Document Summary
Week 4: chapter 5: financial position and cash flows. Usefulness of statements of financial position and cash flows. Statement of financial position: details about financial structure, information about liquidity and solvency. Heavily indebted company may not be able to make most of opportunities. More financial flexibility helps companies survive economic downturns, take advantage of opportunities to invest and expand. Earnings quality: management might manipulate information to make results look better or worse, for strategic reasons. Can compare net income to cash flow to see potential red flags. Ability to service debt: solvency level. Long-term debt, shareholder"s equity: companies with higher debt are higher risk. Need more cash to make principal and interest payments. Statement of financial position: information about nature, amounts of investment in resources, obligations to creditors, equity, helps predict amounts, timing, uncertainty of future cash flows. Greater liquidity means lower risk of business failure.
