Net Income, Cash Flows, Reduced Balance Sheet and WCR (Working Capital Requirements)

17 Pages Posted: 22 Oct 2015 Last revised: 2 Jun 2019

See all articles by Pablo Fernandez

Pablo Fernandez

University of Navarra - IESE Business School

Isabel Fernández Acín

University of Navarra - University of Navarra, Students

Alberto Ortiz Pizarro

University of Navarra, IESE Business School

Date Written: May 28, 2019

Abstract

The net income of a company in a given year is an arbitrary number which depends on several decisions on the accounting of expenses and revenues. By contrast, each cash flow (money going out of the cash of the company into someone's pocket: shareholders, debt owners...) is a single number not subject to any particular criterion.

The case of Madera Inc. is presented and different flows are calculated. The Equity Cash Flow (ECF) is the money which comes out of the cash and gets into the pockets of the shareholders. The FCF (Free Cash Flow) is the hypothetical ECF if the company had no debt. The Capital Cash flow is the Debt Cash Flow plus the Equity Cash Flow. The Debt Cash Flow consists of the sum of the interest plus the repayment of principal (or less the increase in principal).

The reduced balance sheet and the WCR (“Working Capital Requirements”) are also calculated. They allow us to interpret more easily and quicker the accounting statements.The following questions arise: Does the dividend come from the net income? Where are the retained earnings and the reserves? What is the depreciation?


The Spanish version of this paper is available at: http://ssrn.com/abstract=895267.

Keywords: Equity Cash Flow, net income, money, Working Capital Requirements

JEL Classification: G12, G31, M21

Suggested Citation

Fernandez, Pablo and Fernández Acín, Isabel and Ortiz Pizarro, Alberto, Net Income, Cash Flows, Reduced Balance Sheet and WCR (Working Capital Requirements) (May 28, 2019). Available at SSRN: https://ssrn.com/abstract=2675274 or http://dx.doi.org/10.2139/ssrn.2675274

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

Isabel Fernández Acín

University of Navarra - University of Navarra, Students ( email )

Pamplona
Spain

Alberto Ortiz Pizarro

University of Navarra, IESE Business School ( email )

Camino del Cerro del Águila, 3
Madrid, 28023
Spain

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