In common-size analysis of a company’s income statement, each income and expense line item is expressed as a percentage of net revenues (net sales). For the common-size balance sheet, each asset, liability, and equity line item is expressed as a percentage of total assets. The common-size cash flow statement has two alternative approaches. The first…
Evaluation of the cash flow statement should involve an overall assessment of the sources and uses of cash between the three main categories as well as an assessment of the main drivers of cash flow within each category, as follows: Step 1. Evaluate the major sources and uses of cash flow For a mature company,…
Most significantly, IFRS allow more flexibility in the reporting of such items as interest paid or received and dividends paid or received and in how income tax expense is classified. US GAAP classify interest and dividends received from investments as operating activities, whereas IFRS allow companies to classify those items as either operating or investing…
Cash flow from financing activities: Long-term debt and common stock Computing dividends paid Beginning retained earnings + Net income – Dividend = Ending retained earnings
Cash flows from investing activities The second and third steps in preparing the cash flow statement are to determine the total cash flows from investing activities and from financing activities. The presentation of this information is identical, regardless of whether the direct or indirect method is used for operating cash flows.
If a direct-format statement is not available, cash flows from operating activities reported under the indirect method can be converted to the direct method. Accuracy of conversion depends on adjustments using data available in published financial reports. Method to Convert Cash Flow from Indirect to Direct The three-step conversion process:
Operating Activities: Indirect Method Net income is adjusted for the following: Changes in working capital accounts include increases and decreases in the current operating asset and liability accounts. The changes in these accounts arise from applying accrual accounting—that is, recognising revenues when they are earned and expenses when they are incurred instead of when the…
The first step in preparing the cash flow statement is to determine cash flows from operating activities, which can be presented using the direct or indirect method. Cash flows from investing activities and from financing activities are identical regardless of whether the direct or indirect method is used to present operating cash flows. Companies often…
The primary financial statements are as follows: Relationship between Financial Statement Linkages Between Current Assets and Current Liabilities The income statement and statement of cash flows also provide key linkages between the current assets and current liabilities sections of the balance sheet. Differences between the accrual and cash accounting recognition of operating activities result in…
Analysis of a company’s balance sheet can provide insight into the company’s liquidity and solvency—as of the balance sheet date—as well as the economic resources the company controls. Liquidity refers to a company’s ability to meet its short-term financial commitments. Assessments of liquidity focus on a company’s ability to convert assets to cash to pay for…