Finance and Accounting - Net Profit - Coursework Example

 Net Income - The Profit of a Business After Deducting Contents Net Income - The Profit of a Business After Deducting 1 Task 2:- 3 Task 3. 4 Task 4. 5 References 7 Appendices 8 Task 1:- Net profit is generated from profit and loss account and cash flow from operations is generated from cash flow statement. Thus there is difference between net profit and cash flow from operational activities and they might not b equal during a specific period. Profit and loss account can be defined as the statement where expenses and income of a company is calculated and net profit/loss is generated. Cash flow can be stated as the money that comes in and out because of different operating, investment and financial activities. But net profit can be derived by subtracting all expenses from the sales revenue of the firm. Generally accrual method of accounting is followed by all the firms worldwide and according to this method of accounting, net profit/income is generated from the difference3 between all the expenditures which are incurred by the firms and the sales revenue of the firm. For example, if a company earns sales revenue in the month of December and from that 90% is credit sales which will be recovered in the month of February then the amount of revenue will be increased for the month of December but the net cash flow of the company not increase in December. Thus when income and expenses occur in one accounting period and payments and received get done in another period then it makes the change between cash flow from operating activities and net cash flow oaf the company. Cash Flow Statement For The Year 2013 NET INCOME 2,806.00 DEPRECIATION & AMORTIZATION, TOTAL 1,446.00 (Gain) Loss From Sale Of Asset -392 (Gain) Loss On Sale Of Investment -5 Asset Write down & Restructuring Costs 75 (Income) Loss On Equity Investments -91 Stock-Based Compensation 125 Net Cash From Discontinued Operations -251 Other Operating Activities 388 CASH FROM OPERATIONS 4,408.00 Capital Expenditure -3,374.00 Sale Of Property, Plant, And Equipment 1,141.00 Cash Acquisitions -65 CASH FROM INVESTING -3,183.00 Long-Term Debt Issued 2,905.00 TOTAL DEBT ISSUED 2,905.00 Long Term Debt Repaid -2,765.00 TOTAL DEBT REPAID -2,765.00 Issuance Of Common Stock 69 Repurchase Of Common Stock -303 Common Dividends Paid -1,180.00 TOTAL DIVIDEND PAID -1,180.00 Other Financing Activities -92 CASH FROM FINANCING -1,366.00 Foreign Exchange Rate Adjustments 24 Miscellaneous Cash Flow Adjustments -6 NET CHANGE IN CASH -123 Net Profit $2806 million. From the above hypothetical cash flow statement, it can be seen that the net profit is $2806 million and cash flow from operation is $4408 million. We can see the difference between the net profit and the cash from operating activities. It is because calculation of net profit includes all the expenses incurred by the company and the sales revenue but cash generated from operating activities include cash acquisitions, revenue from selling of plants, capital expenses. Thus both cannot be equal at all the time. An organization can have net profit but it may also have negative cash flow from operating activities and it indicates that liquidity of the company is not good. Task 2:- International Accounting Standard 7 statement of cash flow has shown two methods to calculate the cash flow generated from operating activities and those are direct and indirect method. According to the direct method of calculation, information about major elements of gross cash receipts and cash payments is shown as separately and the records of accounts, cost of sales, income statement and sales revenue amount can be used to get the information about the gross cash payments and cash receipts (Thornton, 2012, p.16). But in case of indirect method, profit and loss of the company is adjusted on the items related to investing and financing activities and it also considers the effect of non cash items like inventory, depreciation, provisions, gains and loss in foreign currency transaction, changes in the amount of payables and receivables and tax liabilities. Task 3. a. The cash flow from operating activities for the company Cisco is $12894 million for the year 2013 and it is $ 11491 million for the year 2012. The cash flow has increased over the years as the company has gained on sale of investment and the net income of the company has also improved over the years from 2012 to 2013. The cash flow from operating activities for the company Motorola is $944 million for 2013 and it is $1070 for the year 2012. The net cash flow from operating activities has reduced over the years due to due to increase in the amount of depreciation and amortization and negative income from operating activities. b. The working capital for the company Cisco is $44202 million for 2012 and $43329 million for the year 2013. Increment in working capital indicates that the company is effective enough to manage its day to day activities. The working capital for the company Motorola is $4066 million for 2012 and $3800 million for 2013. The working capital of the company has decreased over the years which indicate that the management is not efficient enough to increase the current assets and decrease the current liabilities of the company. c. The cash flow from financing activities for the company Cisco is negative for both years 2012 and 2013. It is due to increase in issuance of common stock and repurchase of common stock. The cash from financing activities is negative for both the years for the company Motorola. Though the negative amount has decreased over the years but still the company has negative cash flow from financing activities. Although both the companies has earned negative cash flow but it can be said that Motorola will face lower risk than Cisco as it has less negative amounts than Motorola. d. The cash flow from investing activities for the company Cisco is negative for both years. The cash flow from investing activities for the company Motorola is $797 million for 2012 and it has increased to $2010 for 2013. Thus it can be said that the company Motorola has prudent investment strategy as compared to Cisco. Task 4. From the above study we can analyze the cash flow of both the companies. The cash flow from operating activities is better for Cisco as compared to Motorola is terms of amount of cash flow. In case of working capital management we can see that the company Cisco is more efficient than the Motorola in terms of managing working capital for day to day activities. But in case of cash flow from financing activities, Motorola will face lower risk than Cisco and Motorola has more prominent investment strategy as compared to Cisco as the company ahs positive cash flow from investment activities. Thus it can be said that Motorola is more efficient than Cisco in terms of investment strategy and less risk from long term debts but Cisco is better than Motorola as it is more efficient in generating cash flow from operating activities and in working capital Management. References Thornton, G., 2012. IAS 7: Statement of Cash Flows. [Pdf]. Available at: http://www.grantthornton.se/Global/Dokument/Tjanster/Radgivning/IFRS/2012/IAS%207%20Statement%20of%20Cash%20Flows.pdf. [Accessed on February 18, 2014]. Bloomberg., 2014. Cisco Systems Inc. [Online]. Available at: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=CSCO&dataset=cashFlow&period=A¤cy=native. [Accessed on February 18, 2014]. Bloomberg., 2014. Motorola Solutions Inc. [Online]. Available at: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=MSI&dataset=cashFlow&period=A¤cy=native. [Accessed on February 18, 2014]. Appendices Cash Flow Statement Of Cisco Currency in 28-Jul 27-Jul Millions of US Dollars 2012 2013   Reclassified Reclassified NET INCOME 8,041.00 9,983.00 Depreciation & Amortization 2,219.00 1,956.00 Amortization Of Goodwill And Intangible Assets 383 395 DEPRECIATION & AMORTIZATION, TOTAL 2,602.00 2,351.00 (Gain) Loss On Sale Of Investment -31 9 Asset Writedown & Restructuring Costs -- -- Other Operating Activities -314 -37 Tax Benefit From Stock Options -60 -92 Provision & Write-Off Of Bad Debts 50 44 Change In Accounts Receivable 272 -1,001.00 Change In Inventories -287 218 Change In Accounts Payable -7 164 Change In Unearned Revenues 727 598 Change In Income Taxes 418 -239 Change In Other Working Capital -1,321.00 -224 CASH FROM OPERATIONS 11,491.00 12,894.00 Capital Expenditure -1,126.00 -1,160.00 Cash Acquisitions -375 -6,766.00 Investments In Marketable & Equity Securities -2,480.00 -3,916.00 CASH FROM INVESTING -3,815.00 -11,768.00 Short-Term Debt Issued -- -- Long-Term Debt Issued -- 24 TOTAL DEBT ISSUED -- 24 Short Term Debt Repaid -557 -20 Long Term Debt Repaid -- -16 TOTAL DEBT REPAID -557 -36 Issuance Of Common Stock 1,372.00 3,338.00 Repurchase Of Common Stock -4,760.00 -3,103.00 Common Dividends Paid -1,501.00 -3,310.00 TOTAL DIVIDEND PAID -1,501.00 -3,310.00 Other Financing Activities -93 87 CASH FROM FINANCING -5,539.00 -3,000.00 NET CHANGE IN CASH 2,137.00 -1,874.00 Particulars 2012 2013 Working Capital 44,202.00 43,329.00 Cash Flow Statement of Motorola Currency in 31-Dec 31-Dec Millions of US Dollars 2012 2013       NET INCOME 881 1,099.00 Depreciation & Amortization 179 202 Amortization Of Goodwill And Intangible Assets 29 26 DEPRECIATION & AMORTIZATION, TOTAL 208 228 (Gain) Loss From Sale Of Asset -- -- (Gain) Loss On Sale Of Investment -39 -40 Other Operating Activities 256 -243 Minority Interest -- 6 Net Cash From Discontinued Operations 2 -- Change In Accounts Receivable 81 -66 Change In Inventories -3 -10 Change In Accounts Payable -162 -201 Change In Other Working Capital -338 18 CASH FROM OPERATIONS 1,070.00 944 Capital Expenditure -187 -191 Sale Of Property, Plant, And Equipment 56 66 Cash Acquisitions -109 -65 Investments In Marketable & Equity Securities 1,075.00 2,200.00 CASH FROM INVESTING 797 2,010.00 Long-Term Debt Issued 747 593 TOTAL DEBT ISSUED 747 593 Short Term Debt Repaid -- -- Long Term Debt Repaid -413 -4 TOTAL DEBT REPAID -413 -4 Issuance Of Common Stock 133 165 Repurchase Of Common Stock -2,438.00 -1,694.00 Common Dividends Paid -270 -292 TOTAL DIVIDEND PAID -270 -292 Other Financing Activities -53 25 CASH FROM FINANCING -2,294.00 -1,207.00 Foreign Exchange Rate Adjustments 14 10 NET CHANGE IN CASH -413 1,757.00 Particulars 2012 2013 Working Capital 4,066.00 3,800.00 Read More