Question

When looking at the financial statements, you notice that a company has cash flows from operating and investing activities that are significantly lower than their cash flows from financing activities. What can you assume about the company?

A) They are likely in either the maturity phase or the decline phase of the corporate life cycle.
B) They are likely in either the introductory phase or growth phase of the corporate life cycle.
C) They are likely in either the introductory phase or the maturity phase of the corporate life cycle.
D) They are likely in either the growth phase or the maturity phase of the corporate life cycle.

Answer 1

A company with higher cash flows from financing activities compared to operating and investing activities is likely in the introductory or growth phase of its life cycle, relying on external funding sources to support its expansion.

Step-by-step explanation:

When analyzing a company's financial statements, if you notice that their cash flows from operating and investing activities are significantly lower than their cash flows from financing activities, you can infer certain things about the company's life cycle stage. A typical pattern for a company in either the introductory or growth phase is to rely more on financing to fuel its rapid expansion. This often includes early-stage investors, selling stock, or raising funds through bonds or bank loans to finance their operations as their internal cash flows may not be sufficient to support their growth ambitions. Venture capitalists, as early-stage private investors, often have better insight into the company's management and strategy compared to typical shareholders.

Thus, based on the company's heavy reliance on financing activities, it is likely in either the introductory phase or growth phase of the corporate life cycle (Option B).