A. Briefly state how the Income Statement is different from the Cash Flow Statement. Give examples of decisions that can be made from the information provided by each of these statements?
-The income statement shows how much revenue a company has earned over a period of time, which is usually for a year. The income statement also reports the costs and expenses associated with earning the revenue. At the bottom of the income statement it shows the net inome, which shows the actual earnings after expenses, taxes, etc are taken out. This can be a net profit or net loss, depending on how the company performed that year. ...view middle of the document...
-A manager can use the income statement to analyze how much revenue is being lost due to expenses. Expenses are necessary in every business, but there are ways to manage them to save money. It also allows management and investors to decide if the company wants to expand into different markets or create new products. If they see sales are consistently increasing year over year, then it may be a good time to see if it would be beneficial to expand.
-A manager can use the statement of cash flows to provide information about the ability to pay debt owed. The survival of every organization depends on its ability to generate and acquire cash. Companies survive because they have cash, they fail when they don’t. We must therefore be interested in a company’s ability to generate cash for itself, and to acquire it from other sources. If a company is lacking cash flow, management can find ways to increase cash inflows. This could be by selling assets, borrowing money from banks, etc.
Give examples of the types of Cash Flows we see classified as:
Operating Activities, Investing Activities, and Financing Activities.
Operating Activities: Cash received from the sales of goods or services (cash inflow), the purchase of inventory (cash outflow)
Investing Activities: Sale of fixed assets (cash inflow), Capital expenditures and acquisitions (cash outflow)
Financing Activities: Issuance of stocks and bonds (cash inflow), repurchase of stocks and bonds (cash outflow)