The direct method cash flow statement presents operating cash flows from the “top down”, according to the sources and uses of cash. In contrast, the indirect method starts with net income and adds or subtracts changes in working capital accounts until net income is reconciled with operating cash flow.   Typical cash flow sources presented on […]

Under the indirect method cash flow statement, operating cash flow is calculated by reconciling net income to cash flow.  The reconciliation involves (a) adding back to net income any noncash expenses, such as depreciation and amortization, and (b) adding or subtracting changes in operating working capital accounts on the balance sheet.   An increase in a

Book value refers to the accounting net worth, or owner’s equity, of the business.  Book value is presented on the balance sheet in the owner’s equity section. The owner’s equity section on the balance sheet equals the firm’s assets minus the firm’s liabilities.   Book value can be calculated with all of the firm’s assets or

Current assets are economic resources which the firm expects to sell, convert to cash, or consume within the greater of one year or the firm’s operating cycle.   Current assets include cash and equivalents, accounts receivable (also called trade receivables), notes receivable, inventory, and prepaid expenses.   Items on the balance sheet are presented in order of

Current liabilities are obligations to the firm which must be settled within the greater of one year or an operating cycle.   Typical current liabilities include accounts payable (also called trade payables), current portion of long-term debt, and taxes (income, sales, payroll) payable.   Current liabilities are presented on the balance sheet before long-term liabilities.   Current liabilities

Cash flow from investing activities, also called investing cash flow, refers to the net difference between cash sources and cash uses related to a firm’s investing activities.  Cash flow from investing activities is one of three sections of the cash flow statement. The other sections of the cash flow statement are cash flow from operating

Common stock refers to the equity units of a corporation.   Each stock is called a share. When a company creates its main formation document, known as the articles of incorporation, it states within the articles the number of authorized stock shares. Authorized shares are the maximum number of shares which the company can legally issue.  

Cash flow from financing activities, also called financing cash flow, is the net cash flow associated with payments made from and to the firm’s capital providers.  Cash flow from financing activities is one of three sections in the cash flow statement, the other two being cash flow from operating activities and cash flow from investing

Assets are resources that are expected to provide the firm with future economic benefits.  Assets may be categorized as long-term or current. A current asset is an economic resource expected to be consumed or converted to cash within one year or an operating cycle, whichever is longer. A long-term asset is an economic resource not

Cash equivalents are financial securities which can be sold quickly and without impairment in value. Common cash equivalent securities include U.S. Treasury bills and commercial paper.  For accounting purposes, cash (bank balances and petty cash) and cash equivalents are lumped together into a single account on the balance sheet. This account is usually called cash