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Unformatted text preview: useful for assessing a company’s solvency can be found in both the balance sheet and statement of cash flows. The balance sheet lists the company’s obligations and the assets currently available to the company to use to pay off the liabilities. In addition, the balance sheet indicates which liabilities are expected to mature in the near future and which assets are more liquid. The statement of cash flows provides information about where the company is getting its cash and how it is using it. Of particular interest is the net cash generated or used by operating activities. The income statement is the primary source to assess a company’s earning power. Net income represents the net assets the company generated during the year from operations. By comparing net income to certain balance sheet amounts, such as average stockholders’ equity or average total assets, one can assess how effectively a company is using its assets to generate returns. c. Bankruptcies usually imply that a company was unable to pay its debts. Because cash is the most common medium of exchange in the United States, creditors expect to receive interest and principal payments in cash. Thus, a wave of bankruptcies implies that companies were having cash flow problems, which, in turn, increases interest in assessing nonbankrupt companies’ cash flows to avoid other problem loans. ID14–4 a. SuperValu paid out cash when it acquired fixed and intangible assets. Depreciation and amortization of these assets simply represent the allocation of the assets' cost to particular accounting periods. There is no cash outflow or inflow associated with depreciation and amortization. SuperValu is adding depreciation and amortization back to net income to arrive at net cash flow from operating activities because it uses the indirect method to report cash flows from operating activities. With the indirect method, a company begins with net income and then reconciles (i.e., explains) why net income is different from cash flows from operating activities. Since depreciation...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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