Purpose and basic format

1

• Purpose and basic format
• Sample problem
• Indirect method
• Usefulness

2

• Financial Statements
• income statement
• balance sheet
• statement of retained earnings
• statement of cash flows

Where did the cash come from? Where did it go?
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(No Transcript)
4
Start with net income.
Consulting Revenue   Operating
Expenses Rent Repair Salary Utilities Dep
reciation Total  Income from
Operations   Other Revenues and
Gains Unrealized Gains   Net Income
Adjust for non-cash revenues, and expenses.
Adjust for receivables and payables.
5
Start with net income.
Net Income
Adjustments
Adjust for non-cash revenues, and expenses.
Depreciation Expense
Unrealized Gains
Increase in A/R
Increase in A/P
Adjust for receivables and payables.
Cash from Operations
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Adjustments

• add back depreciation other non-cash expenses
• subtract non-cash revenues
• subtract increases in current assets (A/R)
• add increases in current liabilities (A/P)

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7

• Allows investors and creditors
• to predict future cash flows
• to verify that the company can pay its debts
• to understand the financing and investing
  activities during the year
• to identify important changes in current assets

8

• Current cash debt coverage ratio
• liquidity
• Current cash return on sales ratio
• profitability
• Cash debt coverage ratio
• solvency