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Financial Statements, Cash Flow, and Taxes

4 important questions on Financial Statements, Cash Flow, and Taxes

Depreciation and amortization are reported as costs on the income statements. They are not cash expenses however, why?

Cash was spent in the past, when the assets being written of were acquired, but no cash is paid out to cover depreciation and amortization.

What is a statement of stockholders' equity?

A statement that shows by how much a firm's equity changed during the year and why this change occurred.

Statement of Owner's Equity:
Beginning Owner's Equity
+ Net income
- Withdrawals
+ Investments
-------------------------
Ending Owner's Equity

What are financial statements used for? (4)

For example:
1. To see how large a company is.
2. To see if the company is growing.
3. To see if the company is making or losing money.
4. To see if the company is generating cash through its operations, or if the operations are losing cash.

What are limitation of financial statements? (3)

1. Managers may choose to report numbers in a manner that helps them present either higher or more stable earnings over time. As long as they follow GAAP, such actions are legal, but these differences make it difficult for investors to compare companies and measure their true performance.

2. Cases where managers disregarded GAAP and reported fraudulent statements,

3. SOX: required the CEO and CFO to certify that the financial statements were properly prepared. Also created a new watchdog organization to help make sure the outside accounting firms were doing their jobs.

The question on the page originate from the summary of the following study material:

Brigham Managerial Finance

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