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FINANCIAL STATEMENT ANALYSIS
Income Statement
There are two accounts in the Income Statement that represent
sources of cash. The first,
N
ET
I
NCOME
B
EFORE
P
REFERRED
D
IVIDEND
, is
the cash generated by the sale of the product or services that the
company has available for discretionary expenditures. We are
assuming that the costs and expenses related to production, interest,
and taxes are all non-discretionary expenses. For XYZ Corporation,
we will use the line:
Net Income Before Preferred Dividend
$9.9 million
The other account we include in the Cash Flow Statement as a source of
cash is
D
EPRECIATION
. Remember, depreciation is deducted as an operating
expense in the Income Statement. Since depreciation is
not actually a cash outflow, we must add XYZ's 1993
D
EPRECIATION
figure
of $8.9 million into the Cash Flow Statement so that the cash flow sources
are accurate.
Uses
Balance Sheet:
decreased
liabilities;
increased assets
As with the sources, there are two simple rules for calculating the
uses of cash in a company.
1. A decrease in a liability or equity account is a use of funds.
Paying off a loan is one example. In our XYZ Corporation
example, the
O
THER
C
URRENT
L
IABILITIES
account decreased by
$700,000 (from $5.6 million in 1992 to $4.9 million
in 1993). This means that XYZ paid off $700,000 of short-term
liabilities.
2. An increase in an asset account is a use of cash.
The increase indicates that funds were used to purchase
additional assets. XYZ purchased $22.6 million worth of
F
IXED
A
SSETS
during 1992 (from $136.2 million in 1992 to $158.8
million in 1993).