Financial Statement Analysis and Cash Flow Principles

Posted on Dec 6, 2024 in Mathematics

1) Operating Activities: The indirect method for preparing the statement of cash flows involves adjusting net income with changes in balance sheet accounts to determine cash generated from operating activities.

2) Investing Activities: Cash flows from investing activities are crucial, representing a significant source or use of cash, especially in capital-intensive industries like manufacturing. Persistent negative cash flows for fixed assets may indicate growth and expected returns on investments.

3) Financing Activities: Financing activities are also vital, representing a substantial source or use of cash. Smaller organizations with no debt or dividends may not have financing activities to report.

  • Investment (PV) = $10,000
  • Interest Rate (R) = 6.25%
  • Number of Periods (years) (t) = 2
  • Compounding per Period (per year) (m) = 12

FV = 10,000(1 + 0.0625/12)12×2

8) Present Value of a Lump Sum Future Payment:

  • Investment Value in 2 years (FV) = $10,000
  • Interest Rate (R) = 6.25%, (r = 0.0625)
  • Number of Periods (years) (t) = 2
  • Compounding per Period (per year) (m) = 12

PV = 10,000 / (1 + (0.0625 / 12))12×2

9) Future Value of an Annuity Series of Payments Investment:

PMT = The amount of each annuity payment
r = The interest rate
n = The number of periods over which payments are to be made
FVOrdinary Annuity = C * [(i(1+i)n-1) ]

3) Effect of Changes in Short-Term Assets on Operating Cash Flows: Increase in assets decreases cash flow (MAS), decrease in assets increases cash flow (MENOS).

4) Effect of Changes in Liabilities: Increase in liabilities increases cash flow (MAS), decrease in liabilities decreases cash flow (MENOS).

5) Effect of Financing Activities: Increase in financing decreases cash (MAS), decrease in financing increases cash (MENOS).

6) Bond Valuation:

  • When coupon rate = market rate, the bond is at Face Value.
  • When the coupon rate is greater than the market rate, the bond is at a Premium.
  • When the coupon rate is less than the market rate, the bond is at a Discount.

7) Future Value of a Lump Sum Investment:

P = (PMT [((1 + r)n – 1) / r])(1 + r)

Where:

P = The future value of the annuity stream to be paid in the future

10) Present Value of an Annuity of Future Payment:

P = PMT * ((1 – (1 / (1 + r)n)) / r)

where: C = cash flow per period, i = interest rate, n = number of payments

???????? = $10,000(1 + 0.0625/12)12×2 = $11,327

11) Differences between APR and Effective Interest Rate: The main difference between APR and EAR is that APR is based on simple interest, while EAR takes compound interest into account. APR is most useful for evaluating mortgage and auto loans, while EAR (or APY) is most effective for evaluating frequently compounding loans such as credit cards.

12) Journal Entry of Discount Bond Issue:

Dr Cash, Dr Discount, Cr Bonds Payable.

13) Journal Entry for the Payment and Amortization of Discount:

Dr Interest Expense, Cr Cash, Cr Discount on Bonds Payable.

14) Journal Entry of Premium Bond Issue:

Dr Cash, Cr Premium, Cr Bonds Payable.

15) Journal Entry for the Payment and Amortization of Premium:

Dr. Interest Expense, Dr Premium, Cr Cash.

16) Conclusion about Income Statement:

  • Maximize sales at the highest price.
  • Minimize costs.
  • Invest in great administration and infrastructure.
  • Offer the best quality possible.

17) Conclusion about Cash Flow (Financing):

  • Raise as much capital as needed.
  • At the lowest possible cost.
  • For the longest available time (Amortization).
  • Without sacrificing control (51% ownership).

18) Conclusion about Cash Flow (Investing):

  • Invest in the most productive assets.
  • At the lowest possible investment.
  • With financing that matches its useful life.
  • With the greatest intangible potential.

19) Conclusion about Cash Flows (Operating):

  • Collect as quickly as possible.
  • Pay as late as possible without incurring penalties.
  • Move inventory quickly (Turnover).
  • Don’t use cash flow for other activities.

20) Conclusion about Balance Sheet:

  • Keep current assets as high as possible.
  • Keep current liabilities as low as possible.
  • Move current liabilities into long-term.
  • Invest in assets that cannot be easily seen.

Problem 1: Calculating Profit or Loss

  • Add up all your income for the month.
  • Add up all your expenses for the month.
  • Calculate the difference by subtracting total expenses from total income.
  • The result is your profit or loss.

Definition Profit and Los

To calculate the accounting profit or loss:

See these examples:

See how the loss is shown with a negative sign, such as -$25, or in brackets like this ($25).