Meaning of Net Income and Shareholders’ Equity

Abstract

The recent history of Madera Inc. makes us think about the meaning of shareholders´ equity and net income, and also about the impact of two different strategies on the cash flows and the financial statements of the company.

10 issues that may change the net income in 2012 are presented. The reported net income for 2012 was $56 million, but it could have been $58.8 million higher or $112 million lower: net income for 2012 could have ranged between -$56 and $114,8 million.

Similarly, the shareholders' equity reported in 2012 was $292 million, but could have ranged between $180 and $350.8 million.

These accounting changes do not alter “cash and equivalents” nor the financial debt nor the cash flows of the company. It ends with the following questions: What is the net income? What is shareholders' equity? Do dividends come from the net income?

A version in Spanish of this document may be downloaded in: http://ssrn.com/abstract=2252485.

Keywords: Book Value, Free cash flow, Equity cash flow, Capital cash flow, Book value, Market value, Net Income, Working capital requirements

JEL Classification: G12, G31, M21