Module 1.docx

# Both methods provide the same number consider the

• Notes
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and must be read from the notes to the financial statements. Both methods provide the same number. Consider the following financial statement information: Current Accounts o 2015: CA = \$3625; CL = \$1787 o 2014: CA = \$3596; CL = \$2140 Fixed Assets and Depreciation o 2015: NFA = \$2194 o 2014: NFA = \$2261 o Depreciation Expense = \$500 Long-term Debt and Equity o 2015: L-T Debt = \$538; Common Equity = \$462

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o 2014: L-T Debt = \$581; Common Equity = \$372 Income Statement o EBIT = \$1014; Taxes = \$368 o Interest Expense = \$93 o Dividends = \$285 OCF = 1,014 + 500 – 368 = \$1,146 NCS = 2,194 – 2,261 + 500 = \$433 ∆NWC = (3,625 – 1,787) – (3,596 – 2,140) = \$382 o CF A = 1,146 – 433 – 382 = \$331 CF B = 93 – (538 – 581) = \$136 CF S = 285 – (462 – 372) = \$195 o CF A = 136 + 195 = \$331 The CF Identity Holds. The Accounting Statement of Cash Flows Just like cash flows are very different from income, there is also a difference between financial cash flows and accounting cash flows. The previous section discussed financial cash while the statement of cash flows reports accounting cash. The statement of cash flows summarizes all of the sources and uses of cash over the period, but does not represent FCF (i.e., distributable cash flows). The statement of cash flows is divided into three categories: Operating Activity – includes net income and changes to most current accounts Investment Activity – includes changes in fixed assets Financing Activity – includes changes in notes payable, long-term debt, and equity accounts, as well as dividends Balance Sheet:
Income Statement: Statement of Cash Flows: Investment activity = ∆NFA + Depreciation o We must add back depreciation because it was deducted from the fixed asset account to get the net fixed asset figure.

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If the number is positive, then we acquired fixed assets If the number is negative, then we sold fixed assets. o Investment Activity = 3138 – 3358 + 116 = -104 Therefore, we sold \$104 worth of fixed assets *Note: The text (RWJJ) simplifies this calculation as (Sale of FA – Acquisition of FA). However, this information is not part of the balance sheet and must be read from the notes to the financial statements. Both methods provide the same number. Part of the increase in the C/S (common equity) account shown on the balance sheet is the increase in retained earnings, which is already incorporated in the net income under operating activity. o Shares Outstanding = Net Income / EPS = 689 / 3.61 = 190.9 shares o Dividends paid = Shares Outstanding*DPS = 190.9*1.08 = \$206 o Additions to RE = Net Income – Dividends Paid = 689 – 206 = \$483 o Change in C/S = Ending C/S – Beginning C/S – Additions to Retained Earnings = 2556 – 2167 – 483 = -\$94 *Note: Cash flow from financing activities is also simplified in the text (RWJJ) by using information from the notes to the financial statements. Both methods provide the same number.
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