Cash Flow Statement - Coursework Example

Cash Flow ment affiliation Cash Flow ment Net income is the income that the business earns from its operations. Businesses calculate net profits by deducting the value of business expenses deemed legitimate for tax purposes from gross income or gross sales receipt (Bhattacharyya, 2011, p. 88). On the other hand, net operating cash flow refers to amount that business remains with after deducting its ongoing expenses from the amount set aside to cater for such expenditure. Question 1 Conversely, amount available in the business after subtracting expenses does not readily reflect net income of the business since several discrepancies contrast the two figures. When the business makes repayment of principal loan, the repayment is made from the net income or earnings. This transaction is not included in the cash flow because they are going toward settlement of business loan. Net income is prepared based on the general accepted accounting principles (GAAP). Under the accrual accounting principle, expenses are matched with revenues earned in that accounting period (Rich, 2010, p. 56). For instance, a business purchase and pays for merchandise in May, assuming that the merchandise remain in inventory until it is sold in November (end of the accounting period of the business). To this end, business’ net operating cash flow decreases in May when the business pays for the merchandise. However, the net income figure decreases in November when the cost of goods sold is matched with the November sales. Question 2 The main difference between direct and indirect method of cash flow is on the presentation of net cash flow from operating activities. Operating cash flow under direct cash flow statement adds major operating cash receipts and subtracts major operating cash payments. The cash payments are subtracted cash receipt of the business to arrive at the net cash flow from operating activities. Operating activities section – direct method Cash receipts From customers $ xxx Cash payments To supplier (xxx) To employees (xxx) For purchasing of prepaid Assets (xxx) Interest (xxx) Income Tax (xxx) Net cash flow from operating activities (xxx) On the other hand, net income is adjusted by adding and subtracted components to yield net cash from operating activities under indirect cash flow statement. However, indirect method does not report individual items of cash inflow and outflow from operating activities. Operating activities section – indirect method Cash flow from operating activities Net income xxx Adjustment to reconcile net income to Net cash provided by operating activities Decrease in accounts receivable xxx Increase in merchandise inventory (xxx) Decrease in prepaid expenses (xxx) Decrease in accounts payable (xxx) Increase in income taxes payable xxx Decrease in interest payable (xxx) Depreciation expense xxx Loss on sale of plant assets (xxx) Gain on retirement of notes (xxx) Net cash flow from operating activities (xxx) Question 3 a The two companies are consistent in using the indirect method of cash flow statement. In addition, EA GAMES and UBISOFT recorded an increase in the net operating cash flow activities due to increase in net income and proper management of working capital. However, despite the two companies being in the same industry, EA GAME operating cash flow section has more items than in UBISOFT. These items include amortization of deferred charges, amortization of goodwill and intangible assets, asset write down and restructuring costs, changes in deferred taxes, and unearned revenues (Business week, 2014). These items can constitute to differences in cash flow from operating activities. Question 3 b In 2012, EA GAME recorded a decline in its cash flow from operating activities due to poor working capital management. In 2013, the company increased its effectiveness in management of working capital leading to increase in operating income. In this perspective, it increased account receivable thereby decreasing inventories and reducing the owing from creditors. According to 2012 and 2013 financial statement, UBISOFT reduced its inventories by purchasing less from its creditors, thereby the less amount of goods are available to debtors. On the other hand, the company manages effectively other working capital items, which leads to increase from -41.6 to 1.2 in 2013. Question 3 c UBISOFT Company is financed mainly by long-term debts, which constitute to 75% of its holdings. In 2013, the company issued common shares to the public, which increased the value of common shares in the financing options. In an attempt to reduce risk and interest expenses, EA GAME Company upholds a debt free financing policy. To this effect, all company’s debts matured in 2013 thereby making common shares the largest financing item. EA GAME is prudent and faces less risk of fluctuating market prices of debt and other risky financing options. Question 3 d The EA GAME Company increased its expenditure on capital in the year 2013 but did not make disposal of its assets. The main investment activities undertaken by the company is investment in marketable and equity securities. The Capital expenditure of UBISOFT Company increases, but at a decreasing rate. The company reduces its marketable and equity securities by $1.8M in the year 2013. Subsequently, UBISOFT increases its investment by selling off its intangible asset and cash acquisition (Business week, 2014). EA GAME Company diversifies its investment portfolio, thereby reducing its long-term risk in the investment. The company increased its investment in marketable and equity securities, which have relatively less risk. To this effect, EA GAME is prudent as far as investment is concerned. Question 4 Effective management of working capital is important to ensure an increase in cash available to spend on other expenditures. EA GAME is more reliable and promising in generating net operating cash flows. On the other hand, UBISOFT Company is very prudent and less risky in terms of its investment items. The company’s choice of financing items determines its riskiness to fluctuations of prices in the market, thereby influencing its cash flow (Robinson, 2012, p. 156). EA GAME manage its cash flow items in the most effective and efficient way. Reference list Bhattacharyya, D. 2011. Management accounting. Delhi, Pearson. Business week 2014. Financial statement. Retrieved February 21, 2014, from investing.businessweek.com/research/stocks/financials/financials.asp?ticker=EA&dataset=cashFlow&period=A¤cy=native. Business week. 2014. UBISOFT ENTERTAINMENT (UBI:Euronext Paris): Financial Statements - Businessweek. Retrieved February 21, 2014, from http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=UBI:FP&dataset=cashFlow&period=A¤cy=native Rich, J. S. 2010. Cornerstones of financial & managerial accounting: current trends update. Mason, OH, South-Western/Cengage Learning. Robinson, T. R. 2012. International financial statement analysis. Hoboken, N.J., John Wiley & Sons. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=821745. Read More