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McGrew_MBA 733 Week 3 Discussion Issues

McGrew_MBA 733 Week 3 Discussion Issues - Trish McGrew MBA...

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Trish McGrew MBA 733 Prof. Bowsher, Assignment 3-3, January 18, 2011 Week 3 Discussion Issues 1a. “ As an investor, I don’t really care about Net Income. Cash Flow from Operating Activities is a much better indicator of a company’s performance.” Cash flow statements are similar to the income statement in that they provide a look at a period of operations, but they provide a more holistic picture of the company’s entire financial condition. Cash flow statements are broken into three parts: “Cash flows from operating activities”, “Cash flows from investing activities,” and “Cash flows from financing activities.” Cash flows from operating activities starts with the net income, which is the same as the number on the income statement, and then adds back to it accounting charges which are made on the income statement, but which do not accurately reflect cash movements. “Depreciation and amortization” for instance, are recorded on the income statement as costs that are subtracted out of total revenues. However, no cash is actually exchanging hands, so the same amount needs to be added back to net income on the cash flow statement. The point to note is “Net cash provided by operating activities,” which is a similar concept to the income statements operating income. 1b. “ The Statement of Cash Flows is overrated. What is it really telling me–the beginning and ending balance of cash? I can find all that same information on the Balance Sheet.” Like the income statement, the cash flow statement also reflects changes over a period of time, rather than being a snapshot at a fixed point in time as in the balance sheet. This statement reflects all the movements of cash into the company (cash inflow) and out of the company, (cash outflow) in a given period of time. This statement is essential for understanding the company's ability to survive over time. It is possible, for example, for a company to be profitable, yet to
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