Financial Statement Analysis In This Unit You Learned About

Financial Statement Analysisin This Unit You Learned About The Prepara

Financial Statement Analysis in this unit you learned about the preparation and content of financial statements. A common phrase in finance is "cash is king!" With this in mind, the Statement of Cash Flows has been heralded as the most important financial statement. The Statement of Cash Flows on page 2.1.6 presents how changes in Balance Sheet accounts will affect a company’s cash balance. Refer to that information and discuss how an increase in your company's accounts payable from one period to the next is a means to maintain high cash balances in your company’s bank account. Do you believe there are any ethical considerations in slowing payments to your suppliers for the sake of increasing your company's bank balances?

Paper For Above instruction

Financial statement analysis is a critical aspect of understanding a company's financial health and operational efficiency. Among the three primary financial statements— the balance sheet, income statement, and cash flow statement—the Statement of Cash Flows holds particular significance because it provides insights into the liquidity and cash management of a business. It demonstrates how cash moves through the company, highlighting the impact of operating, investing, and financing activities. Within this context, the relationship between accounts payable and cash management is particularly noteworthy, especially as it pertains to maintaining high cash balances.

An increase in accounts payable from one period to the next generally indicates that a company is delaying payments to its suppliers. This practice can serve as a short-term cash management strategy to conserve cash and improve liquidity without altering core operational activities. Essentially, by postponing outgoing cash flows related to supplier payments, a business can retain higher cash balances in its bank account. This approach increases the company's liquidity, providing better financial flexibility, supporting investment opportunities, or covering unforeseen expenses.

From an accounting perspective, accounts payable is classified as a current liability, representing amounts a company owes to suppliers for goods and services received but not yet paid for. When a company increases its accounts payable, it effectively defers cash disbursements, thereby boosting its cash balance temporarily. This practice can be advantageous during periods of cash flow constraints or when the company aims to strengthen its liquidity position without resorting to external financing.

However, the strategic use of accounts payable management raises important ethical considerations. Deliberately extending payment terms beyond agreed-upon deadlines or delaying payments to enhance cash balances can be viewed as manipulative or dishonest if it contravenes contractual obligations or legal requirements. Ethical business conduct emphasizes transparency, fairness, and honoring agreements with suppliers. Engaging in practices that undermine trust or breach contractual commitments may damage reputations and relationships with stakeholders.

Furthermore, intentionally slowing payments for the sole purpose of inflating cash balances could have adverse consequences beyond ethical concerns. Suppliers might face financial difficulties, which can damage long-term relationships or lead to supply chain disruptions. Such behavior may also conflict with the principles of ethical financial management that prioritize honesty, integrity, and respect for contractual obligations.

In conclusion, while increasing accounts payable can be an effective strategy for maintaining high cash balances and improving liquidity in the short term, it must be balanced with ethical considerations. Transparent and fair management of payables ensures that a company's financial practices remain aligned with ethical standards, sustain strong supplier relationships, and support long-term organizational sustainability.

References

• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
• Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
• Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley Finance.
• White, G. I., Sondhi, A. C., & Fried, D. (2003). The Analysis and Use of Financial Statements. Wiley.
• Ross, S. A., Westerfield, R., & Jordan, B. D. (2019). Fundamentals of Corporate Finance. McGraw-Hill Education.
• Fraser, L. M., & Ormiston, A. (2010). Understanding Financial Statements. Pearson.
• Gibson, C. H. (2011). Financial Reporting & Analysis. Cengage Learning.
• Langfield-Smith, K., Thorne, H., & Hilton, R. W. (2018). Management Accounting: Information for Decision-Making and Strategy Execution. McGraw-Hill Education.
• Altman, E. I. (2017). Corporate Financial Distress and Bankruptcy: Predict and Avoid Bankruptcy, Analyze and Invest in Distressed Situations. Wiley.
• Kaplan, R. S., & Norton, D. P. (2004). Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Harvard Business Review Press.