Business – 10.4 Finance and accounting strategy – Use of accounting data | e-Consult
10.4 Finance and accounting strategy – Use of accounting data (1 questions)
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The cash flow statement reveals the actual cash generated and used in operating, investing and financing activities, which is crucial for assessing the feasibility of diversification.
- Operating cash flow: Consistent positive cash from operations indicates the core business can fund part of the diversification without external financing.
- Investing cash flow: Large outflows for capital expenditures may limit the amount of cash available for new investments, suggesting the need to prioritize projects.
- Financing cash flow: Access to additional financing (e.g., new debt or equity) can be gauged by recent cash inflows from financing activities.
Example cash flow summary (in £ thousands):
| Cash Flow Category | Amount |
| Operating Activities | +120 |
| Investing Activities | -80 |
| Financing Activities | +30 |
| Net Increase in Cash | +70 |
Interpretation: With a net cash increase of £70k and strong operating cash flow, the firm has internal funds to support part of the diversification. However, the sizable investing outflow suggests limited additional capacity, so external financing may be required to fully fund the new venture.