Financial Statement Analysis

Question 1

What explains the difference between net income and retained earnings increase?

Answer 1

The remaining $150,000 was paid out as dividends to shareholders.

Retained earnings = Net income – Dividends.

Question 2

What does Retained Earnings represent on the balance sheet?

Answer 2

The cumulative total of earnings not paid out as dividends to stockholders.

It reflects profits reinvested into the company instead of distributed to shareholders.

Question 3

Why is depreciation added back to net income on the cash flow statement?

Answer 3

Because it is a non-cash expense that reduces net income but does not use actual cash.

A $10,000 depreciation expense lowers income but has no cash impact, so it’s added back in CFO.

Question 4

How does a projected statement of cash flows help an investor evaluate a startup’s performance?

Answer 4

It shows the expected cash flows from operating, investing, and financing activities.

An investor can assess whether the company expects to generate or consume cash in each area.

Question 5

What does it indicate if a company has negative CFO and zero CFI, but a large positive CFF?

Answer 5

The company relied heavily on external financing to maintain positive cash flow.

CFO = –$50M, CFI = $0, CFF = +$125M → company is funded by investor capital, not operations.

Question 6

How is an increase in operating asset accounts treated in the indirect method of CFO?

Answer 6

It is subtracted from net income, because it represents a use of cash.

If A/R goes up by $20,000, the company hasn’t collected that cash → subtract from net income.