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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Using the statement of cash flows

You are considering an investment in a new start-up company, Giraffe Inc., an Internet service provider. A review of the company’s financial statements reveals a negative retained earnings. In addition, it appears as though the company has been running a negative cash flow from operating activities since the company's inception.

How is the company staying in business under these circumstances? Could this be a good investment?

To determine

Statement of cash flows

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

To Determine: How the company stays under the circumstance of running a negative cash flow, also explain is Incorporation G a good investment.

Explanation

  • The start-up companies usually have negative operating cash flows and negative retained earnings. The negative retained earnings are occurred due to the losses from high-start up expenses. The negative operating cash flows are usually occurred when the company spent for the growth of the next period. Since growth requires cash and it should be financed with cash.
  • The establishing company always faces problems in spending cash today for the growth of next period. For Incorporation G, the amount spent on salaries is a cash outflow which occurs before the service provides revenues...

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