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Principles of Finance

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How Companies Report Cash Flow

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1 .
Why isn’t the net income reported on a corporate balance sheet a good estimate of the increase in cash that occurred during the year?
2 .
What is the difference between a corporate cash budget and a projected statement of cash flows?

Trade Credit and Interest Rates on Short-Term Borrowing

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3 .
Explain this statement: Accounts payable and accounts receivables are essentially financial opposites.
4 .
Accounts payable is often called “interest-free financing.” As such, explain why a company would choose to pay the amount owed on its purchases of inventory 50 days early. Base your answer on these facts:
  • The annualized cost of forgoing an early payment discount is approximately 16 percent.
  • The company’s cost of borrowing short-term on a bank line of credit is 9 percent.
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