Week 4 - Case Study Cash Flows and Income Statements

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Apr 3, 2024

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Week 4: Case Study Statement of Cash Flows 1 Cash Flow: How to Use for Decision Making FIN 685 Professor Warren Wright Southern New Hampshire University Nicole Johnson January 5, 2024

Week 4: Case Study Statement of Cash Flows 2 In reviewing income statements, balance sheets, and cash flows, businesses can utilize the flow of the three to make decisions regarding the business and observe the activities. Income statements are linked to the balance sheet through retained earnings in shareholders’ equity. The three statements are connected and dependent on each other. Accounting principles come into play and the income statement is not prepared on a cash basis, that means accounting principles such as revenue recognition, matching, and accruals can make the income statement very different from the cash flow statement of the business (CFI Team, 2023). Preparing an income statement just viewing cash basis (i.e., no accounts receivable, nothing capitalized, etc.) it would have no balance sheet other than shareholders’ equity and cash. The emergence of the balance sheet through accounting principles leads to the rise of cash flow statements. Net income comes from the bottom of the income statement which links to the balance sheet and cash flow statements. Balance sheets feed into retained earnings and on the cash flow statement, it’s a starting point for cash from operations. Depreciation, amortization, and other capital expenses on the income statement get added back to net income to calculate the cash flow from operations. The depreciation comes out of the balance sheet and goes onto the income statement as an expense. It then gets added back into the cash flow or the earnings before interest and tax (EBIT), and when added back to cash flow, earnings before interest and tax plus depreciation and amortization (EBITDA) is found. The EBIT is the same as the operating income, and these details are calculated on the income statement. The balance sheet is comprised of assets, liabilities, and owner’s equity toward the end of the accounting period, the balance sheet is what shareholders are going to be looking at because it shows the return on equity, which is going to show the shareholders how well the business is doing to create returns on shares from the investments given.

Week 4: Case Study Statement of Cash Flows 3 The income statement assesses the profits and losses of a business over a period, the income statement also known as the profit and loss (P&L) statement shows a summary of the financial performance. Items included in the income statement are revenue, gains and losses, expenses, and net income/loss. The balance sheet and income statement both provide financial performance over a given period, balance sheets include assets and liabilities, whereas income statements show revenues, gains, and losses. Both can be used to tell different stories of financial health using the ratios that are given from each statement. The way they are used does vary, investors and lenders are going to be more drawn to the balance sheet to determine the assets available for collateral and the business’ creditworthiness, whereas management, investors, and investors are going to look at the incomes statement to assess performance and use them to build out plans for the business. Income statements can be built to show month-over-month or year-over-year comparisons and help management visualize the movements that need to be made to create savvy business decisions. The balance sheet and income statements complement one another, showing a clear view of the company’s financial position and prospects. Partner with the cash flow statement, they comprise the core of financial reporting. Errors or omissions in either of them create inaccurate results across all of them. The income statement and balance sheet follow the same accounting cycle, with the balance sheet created after the income statement. In conclusion, the financial reports all work together to give management and investors a vision of the options the business must make money and grow. These reports work together to give the snapshots needed to make sound business decisions for investors to understand and for management to work together towards the same goals of growth and stability.

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Week 4: Case Study Statement of Cash Flows 4 References: CFI Team. 2023. How the 3 Financial Statements are Linked. Retrieved on January 4, 2024, from https://corporatefinanceinstitute.com/resources/accounting/3-financial-statements- linked/ Sanjay, Vishal. October, 2023. Balance Sheet vs. Income Statement: What’s the Difference? Retrieved on January 4, 2024, from https://www.businessnewsdaily.com/16513-balance- sheet-vs-income-statement.html Yahoo Finance. 2023. Republic Services, Inc. Retrieved on January 4, 2024, from https://finance.yahoo.com/quote/RSG/financials?p=RSG