In a cash flow statement, the cash position at the end of the month represents the amount of cash that the company has on hand, at that moment in time. This cash position is a sign of financial strength and liquidity of the company, representing the ability of the company to meet their current liabilities. A strong cash position is considered favorable. However, a company that holds an overly strong cash position (too much cash) could be displaying signs of wastage. In this case, the cash position of the company should be analyzed appropriately.
The cash position of a company is impacted by both the balance sheet and the income statement, with the ending balance in the cash flow statement matching the cash amount present in the balance sheet. This relationship is made more transparent by the preparation of the statement of cash flows, illustrating how a business’ cash position is affected by these two financial statements.
The cash position of a business is analyzed by both internal and external stakeholders to gain insight around various liquidity ratios. Some examples of liquidity ratios include the cash ratio and current ratio.
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