{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

If a company

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern