Case 10-10
Analysis of “Eat at My Restaurant – Cash Flow”
FIN400 – Analyzing Financial Statements
June 28, 2013
Analysis of “Eat at My Restaurant – Cash Flow”
Understanding the flow of cash within an organization is critical to knowing the health of an organization. Without this understanding, a business may run into a situation where even though they are profitable, they may not have enough cash on hand to meet their obligations. This paper will look at the case study Eat at My Restaurant – Cash Flow (Gibson, 2013) and will analyze the difference between net cash provided by operating activities and net income and determine which a better indicator of long-term profitability is. It will then provide an analysis of the cash flow ratios for each of the firms contained in the case study. Finally, this paper will conclude with a determination of if one of the companies in the case study has a cash flow problem.
Net Cash versus Net Income
Net income is derived from the Income Statement, which is based on the accrual method of accounting. Under the accrual method, revenue is recognized when earned and expenses are recognized when incurred. Net cash provided by operating activities uses the cash method of accounting where cash and expenses are recognized when received and paid. For example, under the accrual method, which net income is based on, a company would recognize revenue for services delivered based on the delivery of services instead of when a customer actually pays the invoice for these services. This is an important distinction because from an income perspective, the company will eventually receive that money, the company will not actually have that cash in-hand to pay expenses or make investments until receipt of payment from their customer. This could create a situation where although the company looks profitable, in reality they cannot make their short-term commitments.
When considering whether net cash provided by operating activities or net
FIN400 – Analyzing Financial Statements
June 28, 2013
Analysis of “Eat at My Restaurant – Cash Flow”
Understanding the flow of cash within an organization is critical to knowing the health of an organization. Without this understanding, a business may run into a situation where even though they are profitable, they may not have enough cash on hand to meet their obligations. This paper will look at the case study Eat at My Restaurant – Cash Flow (Gibson, 2013) and will analyze the difference between net cash provided by operating activities and net income and determine which a better indicator of long-term profitability is. It will then provide an analysis of the cash flow ratios for each of the firms contained in the case study. Finally, this paper will conclude with a determination of if one of the companies in the case study has a cash flow problem.
Net Cash versus Net Income
Net income is derived from the Income Statement, which is based on the accrual method of accounting. Under the accrual method, revenue is recognized when earned and expenses are recognized when incurred. Net cash provided by operating activities uses the cash method of accounting where cash and expenses are recognized when received and paid. For example, under the accrual method, which net income is based on, a company would recognize revenue for services delivered based on the delivery of services instead of when a customer actually pays the invoice for these services. This is an important distinction because from an income perspective, the company will eventually receive that money, the company will not actually have that cash in-hand to pay expenses or make investments until receipt of payment from their customer. This could create a situation where although the company looks profitable, in reality they cannot make their short-term commitments.
When considering whether net cash provided by operating activities or net
References: Gibson, C. H. (2013). Financial Reporting & Analysis. Mason: South-Western Cengage Learning.