FINA 470 Chapter Notes - Chapter 7: Financial Statement Analysis, Cash Flow, Income Statement

71 views3 pages

ambermuskrat630

30 Mar 2017

School

USC, SC, Carolina, South Carolina

Department

Finance

Course

FINA 470

Professor

austin

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Chapter 7: the two methods of reporting cash flow from operations are: Indirect method: under this method net income is adjusted for noncash items required to convert it to cfo. The advantage of this method is that it is a reconciliation that discloses the differences between net income and cfo. Some analysts estimate future cash flows by first estimating future income levels and then adjusting these for leads and lags between income and cfo (that is, noncash adjustments). Direct (or inflow-outflow) method: this method lists the gross cash receipts and disbursements related to operations. Draft that preceded sfas 95 preferred this method because this presentation discloses the total amount of cash that flows into the enterprise and out of the enterprise due to operations. This gives analysts a better measure of the size of cash inflows and outflows over which management has some degree of discretion. This is done by matching expenses and losses with the revenues and gains earned.

Related Questions

Please write a 250 response to the below discussion and please include 2 scholarly sources.

There are many advantages and disadvantages of the indirect and direct method of preparing the income statement of cash flows. As a company itâs important to know which method better suites your line of business and which method is most accurate. The statement of cash flow is meant to predict future cash flows, evaluate management decisions, determine ability to pay dividends and interests, and shows the relationship of net income to cash flows. There are two ways this can be done, through the indirect method or the direct method.

The indirect method which is used by vast majority reconciles from net income to net cash provided by operating activities. Some advantages of this method includes; the information is more up to date and available, it show combined financial statements, reveals non-cash organizational transactions, and it is a industry standard that is used by most organizations.

The direct method which is used by a minority of companies reports all cash receipts and cash payments from operating activities. An advantage of the direct methods is that it reveals operating cash receipts and payments. A disadvantage to this method is although this method is easier the more transactions a company have the more complicated and time consuming this method gets. This is because each transaction is analyzed to decide whether it involved an actual transfer of cash.

If I had to choose between the two methods I would choose the indirect method because it is used more often, making it easier to compare and contrast amongst other companies if necessary.

cerisegoldfish626

INSTRUCTION: Answer all questions in this section. Each question carries 2 marks. Answer True or False to the following questions.

1. The cash conversion cycle of a firm is the length of time between the actual cash outflow for materials and the actual cash inflow from sales. To calculate this cycle, we need all the information used to calculate the operating cycle plus Days Payables Outstanding (DPO).

2. Net working capital is defined as current liabilities minus current assets.

3. Sales volume and collection period will be affected by a firm's credit policy.

4. Accounts payable, or trade credit, increases net working capital.

5. Efficient cash management is often concerned with speeding up the collection of cheques received and slowing down the payment of cheques issued.

Choose the letter a, b, c, or d that carries the best response.

6. The income statement reports the results of operations during the past year, the most important item being:

Net Income

Interest Expense

Earnings Before Interest and Taxes

Earnings Per Share

7. Which would represent claims against assets in the balance sheet:

Liabilities

Liabilities and stockholders' equity

Common stockholders' equity

Both common and preferred stockholders' equity

8. The two accounts that normally make up the common equity section of the balance sheet are and

accounts payable; accruals

common stock; retained earnings

long-term bonds; common stock

equity; liabilities

9. Accounting profits is different from net cash flow because

Net cash flow includes profits from operations.

Non-cash items are not included in the accounting profits

Net-cash flows take account of all non-cash items

Accounting profits overlooks depreciation and taxes

MGMT2023

Page 3

10. Which of the following represents an investing cash outflow?

An increase in holdings of stocks of other companies

A decrease in accounts payable

A decrease in gross property, plant and equipment

A decrease in accumulated depreciation

11. Which group of ratios show the combined effect of liquidity, asset management and debt on operating results?

Liquidity ratios

Debt ratios

Coverage ratios

Profitability ratios

12. Cottler Ltd. has current_. assets equal to $4.5 million. The company's current ratio is 1.25, and its quick ratio is 0.75. What is the firm's level of current liabilities in millions
	$3.6
	$0.18
	$2.4
	$2.9

13. You are given the following cash flows. What is the present value (t = 0) if the discount rate is 12 percent?

Time	0	1	2	3	4	5	6
Cash flows	0	1,000	2,000	2,000	2,000	0	-2,000

	PV= ?
	$3,277
	$4,169
	$5,302
	$4,289

14. You invest $5,000 today. You will earn 8% interest. How much will you have in 4 years? (Pick the closest answer.)

	$6,802
	$6,843
	$3,675
	$3,475

15. You are buying your first house for $220,000 and are paying $30,000 as a down payment. You have arranged a 30-year mortgage loan With a 7% nominal interest rate and monthly payments. What are the equal monthly payments you must make?

	$1,513
	$1,464
	$1,264
	$6,922

amaranthyak153

Objective: To analyze the financial statements of a publicly traded company Obtain an annual report from a publicly traded corporation that is interesting to you. Be sure the companyâs financial statements include deferred taxes, post-retirement benefits, dilutive securities, and share-based compensation. Using techniques you have learned in the previous weeks, respond to the following questions. What amount of deferred tax assets or deferred tax liabilities are on the two most recent years on the balance sheet? What gives rise to these deferred taxes? What information is disclosed in the footnotes related to deferred taxes? Please define a deferred tax asset and deferred tax liability. What temporary and permanent differences does the company disclose in their footnotes? What are some other examples of temporary and permanent differences? What is the amount of income tax provision in the two most recent years on the income statement? What information is disclosed in the footnotes relating to income tax expense? Does the company have a net operating loss carry-forward or carry-back? What are the guidelines for carry-forwards and carry-backs? Does the company have a defined benefit or defined contribution plan? What are the key elements of the plan discussed in the footnotes? What amounts on the balance sheet relate to this plan? What are the differences between defined benefit and defined contribution plans? What are the earnings per share amounts disclosed on the income statement for the most recent year? What dilutive securities are discussed in the footnotes? Please identify and describe other examples of dilutive securities. How do these impact earnings per share? What kind of share-based compensation does the company have? What was compensation expense for the two most recent years? What are the key elements of this plan discussed in the footnotes? Please identify and describe other types of share-based compensation. Does the company use the direct or indirect cash flow presentation method? What is the difference between these two methods? How does the cash flow statement agree to the other financial statements? What investing and financing activities does the company have? What are some other examples of investing and financing activities? What noncash transactions does the company have on its cash flow statement? What are some other examples of noncash transactions? Guidelines Back to Top Papers must be 7â10 pages in length, double-spaced, and with 12-point font. Include a cover page, table of contents, introduction, report body, summary or conclusion, and works cited. Even though this is not a scientific-type writing assignment, references are still very important. At least three authoritative, outside references are required (anonymous authors or web pages are not acceptable). These should be listed on the last page titled Works Cited. Appropriate citations are required.

FINA 470 Chapter Notes - Chapter 7: Financial Statement Analysis, Cash Flow, Income Statement

Document Summary

Get access

Related Documents

AFM101 Chapter Notes - Chapter 5: Cash Flow, Current Liability, Income Statement

Accounting ACCT 2610 Lecture Notes - Lecture 12: Retained Earnings, Free Cash Flow, Accounts Payable

ACCT 203 Lecture 4: Class note 4

Related Questions