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Benefits of Statement of Changes in the Financial Position of a Company
Apart from having excellent analytical value, the statement of changes in the financial position helps stakeholders understand numerous other aspects of a business. It offers insights into the working capital and cash inflow position of a company. As the statement includes funding details of the past, it helps analysts in understand the financial and investment policies followed by the company in the past. It also shows the non-current assets that have been acquired by the firm and the resources that have been used for doing so.
Furthermore, it also helps a company in realizing the basics in the following areas −
The statement of changes in the financial position helps analysts learn what is the liquidity position of a company. It also helps to let them know whether the company has had enough liquidity during the time period covered by the statement.
Working Capital and Cash Flow
The statement helps one to understand the sources and uses of working capital, showing the cash inflows and outflows at various positions of the duration of the statement. This helps the stakeholders understand the operational policies and strengths of the firm in detail.
The statement of changes in financial position helps one to see which current assets are acquired by the company and when. This, in turn, helps the investors and stakeholders stay aware of the expenses made by the company.
A good statement of changes in financial position offers all insights into the dividends-paying mechanism of the company. It shows whether the dividends have been paid regularly, and if the company skipped paying dividends, was it due to a shortage of funds. Knowing these details can offer analysts to take action to bring the firm’s finances back onto track at the opportune moment.
Funds Generated from Current Assets
As the statement shows the amount of funds from current assets used to power working capital, the investors can stay aware of the company’s financial strength during the period covered by the statement. If the company had enough working capital that had been generated from current assets, this means that the firm had strong financial health. Otherwise, there would be a need to look for the reasons for the failure to meet the needs.
External Sources of Funding
A good statement of changes in the financial position of a company shows how much external sources have been used to fund its projects. This helps the finance managers realize the needs of the company and how much the company owes to external lenders.
This, in turn, helps them assess the need for income that is required to meet the borrowing levels of the company.
Debt Equity Ratio
In the case when a company acquired external financing, what was the debt-equity ratio of the funding? The statement reveals this and more so that the analysis and investors can measure whether the company would be able to meet the needs of debtors in the near and long term future. This is very important because a weak debt to equity ratio means that the firm is sick in terms of finance.
Use of Non-Current Assets
The statement also helps one to see the use of non-current assets, especially whether non-current assets have been sold? If an item is sold, where did the proceeds of the sale go? The statement of changes in financial position would reveal this.
Payment of Long-Term Debt
The statement of changes in financial position shows whether a firm can meet the long-term debt. This helps investors stay calm and attract more investments for the new projects of the company.
Funding Without Working Capital
Finally, a good statement of changes in the financial position of a company shows the financing and investment activities of the firm that had been done without the use of working capital. If there are enough such projects, the company is in good condition. However, the lack of this should lead to an inspection for the reasons.
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