Kimmel Financial Accounting Solutions Ch12

Net income is not a sufficient indicator of the financial health of an entity. It only serves as a basis of allocation of expenses from the revenues that are generated for a certain financial period. It involves “noncash expenses,” specifically “depreciation and amortization of intangible assets” that reduces its value, but have no effect on the net cash flows of the business. It also differs with cash flow under the context of timing of revenue and expense versus the actual “occurrence” of cash flows (Williams, et al.). There are other considerations that must be probed at, such as the procurement of funds from credit facilities, the ability to pay short-term and long-term financial obligations, distribution of annual dividends, cash inflow and outflow from operating, financing and investing activities. Along with the income statement, balance sheet and critical analysis of several factors, the use of cash flow statement of the company serves an important indicator of the financial health and continuous operations of the business.

The cash flow statement detects the cash that is flowing in and out of the company. Generating more cash on a consistency empowers the company to increase its dividend, reduce debt, buy back some stock, or even acquire another business. It must be noted that without the proper amount of cash on hand, the potential of long term success could possibly lead a company into bankruptcy. Reporting the company’s net income and then converting from the accrual basis of the cash basis by using the changes in the balances of current asset and current liability accounts, such as: Accounts receivable, inventory, supplies, prepaid insurance, other current assets, notes payable, wages payable, payroll taxes payable, interest payable, income taxes payable unearned revenues, and other current liabilities. The operating activities have adjustments for depreciation expense and for the gains and losses on the sale of long-term

| The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed.

The cash flow statement reveals that net cash from operating activities, after deducting dividend payments is very low. The major cash flow impacts are capital expenditure of $300,000 over the last three years and borrowings of $150,000. The balance of $150,000 has been funded from operating activities and has been the cause of the reduction in the closing bank balance to $20,000. This in turn has affected the working capital ratio.

1. A major advantage of the partnership form is that the personal assets of the partners are protected from creditors in case of legal action- False

P4–6 Finding operating and free cash flows Consider the following balance sheets and selected data from the income statement of Keith Corporation.

The calculation of ABC co.’s Cash Flow statement involves cash receipts and cash payments in three categories as, operating, investing, and financing activities. This calculation tells that the ABC Company enjoyed a cash flow provided from operations of about $3,500 in year 19X2. The statement also shows that ABC Company used more cash in investing activities than was provided from different sources. The net cash flows from ABC Company’s business were positive, $3,000. For ABC co. cash generated from operations is the primary source of cash flow, the company used the cash flow from operating and investing activities to make payment of dividends. (See appendix)

Personal Financial Statement ............................................................................. 22 IX. Startup Expenses and Capitalization ................................................................ 23 X. Financial Plan ....................................................................................................... 24 XI. Appendices ........................................................................................................... 27

Discuss the credit analysis process. [ Healy, P., & Palepu, K. (2012). Business analysis valuation: Using financial statements (5e ed.).

There is an old saying by Earl Wilson (2015) that states “Today, there are three kinds of people: the haves, the have-nots, and the have-not-paid-for-what-they-haves” (p. 1). This saying also applies to businesses, and investors will try to identify which category a company falls in as they conduct their research. Investors want to know they are committing their money to an organization that can effectively manage its cash. Cash is the fuel within every organization. It is extremely important for every executive, manager, and investor to understand the cash flow battle rhythm within their organization by utilizing the statement of cash flow. Analyzing the statement of cash flow, will enable investors to determine if a company is effective at managing their finances.

Explain the uses and limitations of a balance sheet. Identify the major classifications of the balance sheet. Prepare a classified balance sheet using the report and account formats. Determine which balance sheet information requires supplemental disclosure. Describe the major disclosure techniques for the balance sheet. Indicate the purpose of the statement of cash flows. Identify the content of the statement of cash flows. Prepare a basic statement of cash flows. Understand the usefulness of the statement of

Study Objectives 1. Prepare the entries for cash dividends and stock dividends. Identify the items reported in a retained earnings statement. Prepare and analyze a comprehensive stockholders’ equity section. Describe the form and content of corporation income statements. Compute earnings per share.

Have you ever wondered exactly how major corporations manage their earnings and spendings? Each company needs to be able to keep track of the flow of their money, whether it is coming in or going out. They also need to have it documented and provide it to certain individuals. This report is a summary of their financial performance, comprised of every revenue, expense, asset, liability, and equity that company made over the past year. They provide this report to their shareholders, it is a very important tool of communication between manager and owner, and it is used for tax purposes. In order for corporations to account for their financial transactions, they need to prepare three things; an income statement, a balance sheet, and a statement of cash flows.

In order to understand the performance of a firm, the manager within the firm and the firm’s owners and lenders need to have accurate and up to date financial information. This information is contained in three financial statements: the income statement, the balance sheet and the statement of cash funds (Melicher & Norton, 2014). Each of these statements indicates a certain aspect of the financial status of the firm and reveal the critical financial elements of the business; revenues, expenses, assets, liabilities, and equity (Melicher & Norton, 2014). When combined, these financial statements should provide the overall financial status of the firm and indicate the performance of the firm (Melicher & Norton, 2014).

When it comes to understanding business finances, the ability to read different financial statements becomes crucial. A cash flow statement is an important and essential part of keeping a record of the business’ financial liquidity. Business’s liquidity matters because it often directly signals the company’s ability to pay off debts and to generate money.