Global Journal of Management and Business Research, C: Finance, Volume 22 Issue 5

In synthetic terms, it is possible to state that the objective of financial flows is twofold: 1. Identification of all financial income and expenditure; 2. Comparison between recurrent income and expenditure and, by residue, between non-recurrent (occasional) income and non-recurrent (occasional) expenditure. The following pages will emphasise that the concept of income and expenditure is not unambiguous. If inflows and outflows focus on the need or source expressed in monetary terms, the flows can be defined as liquidity or, alternatively, cash flows. However, it is possible to interpret the concept of need or source in a broader sense. In this case, need and source include cash inflows and outflows and the idea of the emergence and extinction of debits and credits. If this concept is adopted, it can be understood that income and expenditure are no longer expressed in monetary terms but rather in financial terms. In this case, flows are referred to as 'financial in the broad sense'. Within this category of flows, various notions of debits and credits can be identified and referred to. As you will understand from reading the following pages, the financial flows belonging to the latter category, which are helpful for analysis purposes, focus on movements in net working capital. For this reason, this tool is referred to as analysis by flows expressed in terms of net working capital. The reader is referred to the following pages for a more detailed discussion of the various types of flows and the actual use of the individual tools. In the preceding pages, it has been shown how, to implement a financial analysis, it is necessary to develop an in-depth analysis of cash flows. The ultimate objective of this analysis technique is the qualitative comparison of recurrent income vs recurrent expenditure and non-recurrent income vs occasional spending. Moreover, it can only achieve financial equilibrium if recurring income exceeds recurring payment. It must consider the more significant the difference between the two aggregates, the more solid the enterprise's financial balance. If resorting to an occasional source to meet an equally occasional requirement is a sign of good financial equilibrium, it is undoubtedly a sign of perfect financial stability to be able to cover an occasional need with a source that can be relied upon periodically over time. To make this concept easily understandable, think, for example, of the case in which an individual managed to buy his own house, not with a mortgage, but with his regular income from his salary. It is evident how this situation represents the perfect financial equilibrium since, when this hypothesis occurs, the recurrent source not only manages to cover recurrent needs but even contributes to covering needs of a merely occasional nature. Therefore, the flow objective is to identify all income and expenditures to subject them to qualitative monitoring. As will be seen when reading the following pages, while interpreting results is straightforward, calculating cash flows appears to be arduous. The focus will therefore be on how the cash flows are calculated, as the interpretation poses no particular problems. Since this section is intended to determine cash flows, it will restrict the notions of requirement and source to a purely monetary concept. Therefore, when reference is made to a requirement, it will implicitly mean a liquid requirement, i.e. a cash requirement and an active bank. Conversely, when reference is made to a source, it will implicitly mean a source expressed in monetary terms of cash and active bank. Regarding the use of flows, it should note that doctrine, practice, and finally, accounting standards agree that it is more beneficial to analyse cash flows than other flows. The analysis of cash flows, e.g. of working capital, is no longer considered particularly significant for analysing the financial situation since financial equilibrium can conceal a profound monetary imbalance. This is why cash flows represent the most widely used dynamic analysis tool at the operational level and are most studied in theoretical terms. It is evident that flows do not relate to an instant, like indices, but consider a period. This is why flows are defined as dynamic, as opposed to indices, which are interpreted as static elements of analysis. It should note that the period taken into consideration may be the financial year, the month, the week or even the day. We will return to the respect of the most suitable period in the following pages. Analysing the above cases, one can see that examples have developed that cover every accounting event of financial reporting: ► an increase in activity; ► a decrease in assets; ► an increase in liaoilities; ► a decrease in liaoilities; ► an increase in equity; ► A decrease in net assets; ► a cost; ► and finally, revenue. Generalising the above examples, it can be said that: ► an increase in an asset corresponds to a requirement; ► a decrease in an asset corresponds to a source; ► an increase in liaoilities corresponds to a source; ► a decrease in a liaoility corresponds to a requirement; ► an increase in an equity item corresponds to a source; ► a decrease in an equity item corresponds to a requirement; ► a cost corresponds to a requirement: ► and a revenue corresponds to a source. 12 Global Journal of Management and Business Research Volume XXII Issue V Version I Year 2022 ( ) C © 2022 Global Journals Does the Formal Structure of the Cash Flow Statement have an Impact on the Understanding of the Data Contained in the Report Explaining the Company's Financial Dynamics?