Final answer:
Users of cash flow statements prefer enterprises that generate cash from operating activities as it indicates profitability and financial health. Financing and investing activities provide funds but can increase debt or dilute ownership. Reinvesting profits is key for sustainable growth.
Step-by-step explanation:
Investors, creditors, and other users of the statement of cash flows generally prefer enterprises that are able to generate cash from operating activities. This is because cash flow from operating activities is considered a more reliable and direct indicator of a company’s financial health compared to cash generated from financing activities or investing activities. Financing activities often include raising capital by borrowing through banks or bonds and selling stock. These methods can provide necessary funds but can also increase debt or dilute ownership. Similarly, investing activities like purchasing assets can lead to future benefits but typically require large outflows of cash upfront.
Generating cash through operating activities indicates that a company is profitable through its core business operations, which is an essential aspect for long-term sustainability. This approach involves reinvesting profits back into the company to stimulate growth, showing that the business is self-sufficient and capable of expanding with its own resources. Reinvesting profits is a critical way for businesses to grow their operations without incurring debt or relinquishing control to shareholders.