Identify the Economic Characteristics and Competitive Dynamics of the Industry in Which a Particular Firm Participates

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Form 10-Q Quarterly Report

Prospectus or Registration Statement

Statement of cash flow

Beginning Cash + Cash Receipts – Cash Expenditures = Ending Cash Balance

The direct method, which is preferred by both the FASB and IASB, lists individual classes of cash receipts and cash payments, such as cash collected from customers, cash paid to suppliers, and cash paid to employees.

In contrast, the indirect method reconciles reported net income to cash flows from opera- tions by ‘‘undoing’’ non-cash (accrual) components of earnings.

Direct method: two types of adjustments to net income—working capital and non-working capital adjust- ments.

non-working capital adjustments include depreciation, amortization, deferred taxes, and gains/losses on asset dispositions. These adjustments affect current period net income, but do not affect current period cash flows, so must be ‘adjusted out’ of the starting point of the statement of cash flows—net income.

- addback depreciation expense to net income

- added back bad debt expense

- addback for deferred income taxes (expense – payable)

- add back stock-based compensation expense

- addback for a loss and a subtraction for a gain

- subtraction from net income for the investor’s share of the investee’s earnings and an addition for the dividends received

- deductions for the noncontrolling interest

- add back the pension expense and deduct the actual cash contributed to fund pension assets and postretirement benefits

- impairment charges must be added back

Working capital adjustments, on the other hand, are adjustments for changes in operating working capital accounts during the period. Non-Cash Working Capital = Non-Cash Current Assets minus Current Liabilities

- increases in accounts receivable are subtracted from net income; decreases in accounts receivable are added to net income.

- inventory balances increase, the cash flow statement subtracts this amount

- subtract increases in prepaid expenses or add decreases in prepaid expenses.

- added back Accounts payable and accrued expenses

Net Income Relative to Cash Flows from Operations

- Type 1 adjustments

- Usually increase cash flows over net income

- Type 2 adjustments’ effects depend on:

- Firm’s stage in life cycle

- Length of firm’s operating cycle

Type 1 adjustments

+ Depreciation and amortizations

+ Stock based compensations

-Gains/ losses (non-operating activities) e.g. borrowing and selling land

Type 2 adjustments

-the change in non-cash current operating assets (short-term note receivable(investing section), reclassified available for sale securities)

+ change in operating current liabilities

- Short-term notes payable (financing)

- Current portion of long-term debt (financing)

Type 1 adjustments

- Usually increase cash flow over net income

- Would be positive

Type 2 adjustments

- Firm's stage in life cycle

- Length of firm's operating cycle

- Would be small

- Cash from operating activities > net income

High growth companies:

- Type 1 adjustments would be positive

- Type 2 adjustments higher

- CFO can be pretty different from net income

Why Do Adjustments Rarely Equal the Changes in Assets and

Liabilities on the Balance Sheet?

- Acquisitions and divestitures.

- Non-cash transactions

- Changes in contra accounts.

- Foreign currency translation.

D Cash = D Liabilities + D Shareholders’ Equity – D Non-Cash Assets

Cash Collected from Customers = Sales – D Accounts Receivable

Purchases of Inventory = Cost of Goods Sold + D Inventory

Investments in Securities

Recognition of income or loss using equity method: Operating (subtraction or addition)

Acquisition or sale of investments Receipt of dividend from investee Purchases or sales of securities : Investing (outflow or inflow)

classified as ‘‘trading’’ securities : Operating (inflow)

Classification in Statement of Cash Flows : Operating (outflow or inflow)

Cash Paid to Suppliers = Purchases of Inventory – D Accounts Payable

Ending Retained Earnings = Beg. Retained Earnings + Net Income Dividends -Dividends

Retained Earnings = Net Income - Dividends

Net Income + Other Comprehensive Income = Comprehensive Income

Profitability Analysis

Evaluates