Part 1
The core purpose of every business organization is making of profit. However, profit may not be important in the books of accounting. Cash and cash flow shows a lot about the future of a business. A new business may not make profit for the first two years but may start making profits in the third year. Cash and cash flow reflect the revenue that a business earns. Cash flow statement reveals the transactions that took place and how the revenue was spent. It is a useful tool for making financial decisions ( Hoque et al., 2013) . On the other hand, profit and loss accounts seek to find out the profit or loss that a company makes after meeting the costs of production. A profit and loss account is only concerned about revealing the balance after a company meets its cost of operation. Therefore, while cash flow statement explain the movement of funds from revenue to expenses, profit and loss account balances cost of production to revenue within a given period of time to reveal the profit or loss earned.
Part B
Organizations make use of different tools of financial analysis to achieve two main purposes, which are analysis of risk and analysis of profitability. There are various types financial statements used to carry out the process. The financial statements include profit and loss statement, balance sheet, cash flow, and equity. The information is used by stakeholders both from within and outside the organization ( Tracy, 2012) . For instance, risk analysis can be used by creditors to determine the credit worthiness of a company. One of the tools used for the purpose is current ratio which compares the current assets to current liability. If the ratio is greater than one, it means the company is able to meet its short term obligation. As mentioned earlier, financial analysis also help in profitability analysis. Similarly, there are several tools that companies can apply. An example is the profit margin that compares the profits earned to the revenue to reveal the ability of a company to make profits.
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References
Hoque, M., Bhandari, S. B., & Iyer, R. (2013). Predicting business failure using cash flow statement based measures. Managerial Finance .
Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet . RatioAnalysis. net.
