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Author: TMFOtter Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2203  
Subject: Re: Some terms not in your dictionary Date: 4/11/2002 7:03 PM
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angello:

Great question. Unfortunately, the answer is "it depends". We do recommend that people focus on the cash flow statement, but there's a good reason that companies issue three sheets -- they're interrelational.

In your example, the biggest change was in working capital. Working capital can be several things: assets such as inventories, receivables, and so on, but it is also current debt. In general you'd like to see a lower level of working capital, particularly if it means that the company has lower current debt or lowered its level of inventories. Both of these things, of course, are represented on the balance sheet. Here's where it gets confusing. This company's working capital rose (I assume that the left is the most recent period) by $50 million. Was that simply more cash? That's a good thing. Was it a higher current portion of debt? Not so good. You need the balance sheet to tell.

Non cash items are things that a company has to account for on its income statement that do not require someone writing a check. Think of a car. This year it is worth less than it was last year. If it was $10k last year and $8k this year, you have an implied cost of $2k, even if you didn't actually have to pay anyone. This company's non-cash expenses were MUCH higher in the most recent quarter, and that effects GAAP income. But no cash means no effect to cash flow, so it's added back here. Other non-cash things would be writeoffs of businesses that they have closed, or changes in deferred income taxes, and things on this order.

All in all, I find the sheet you're looking at to be more illuminating, for the exact reason that EVERYONE else looks at the income statement as being most important. If a comapny were to fudge its numbers, wouldn't it do so in the place that the most investors are paying attention?

Great question!

Bill Mann
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