As a 2 month old MBA student from an engineering background, this article has been very helpful to me as I am preparing for a financial accounting exam and have been struggling with cashflow analysis. Keep up the good work, glad to see that you are Christian, I am too.

Blessings,
Anand

I think it was just the “increase/decrease” wording that was confusing (decrease as in “decrease toward zero,” or as in “more negative”). Perhaps a more precise language would be “debit” on sales and “credit” on payment. I’m relatively new to analyzing financial statements, so this kind of clarity helps me!

“If accounts receivable decreases…this means that more cash has entered the company from customers paying off their credit accounts.
…
In AeroGrow’s latest filing 10-Q filing…accounts receivable decreased by $9.9 million… In other words, AERO sold $9.9 million worth of goods without being paid.”

There’s a contradition there – I think you should have meant AERO got paid for $9.9mil worth of goods. So you’d have to change your conclusion. Perhaps AERO had really bad sales and didn’t replace the expired ARs with fresh ones from new sales. Or maybe they changed their credit policy…

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Thanks for that tip. I havent considered that much. Will look into it.

Also, is it just me, because I cant seem to leave comments on your blog with firefox. I keep getting 404 errors as well.

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You are right about sales figures on the Income statement being Net Sales, but this number is also just a rear view number. A representation of what has happened in the stated period only on the income statement.

I don’t believe Net Sales provides a picture of the future possibility of what could happen with an Accounts Receivable that increased by 330% and inventory increase of over 200%.

What I have tried to explain in this post is the way for people to look at the numbers and think about the possible future outcomes and warning signs. The whole point is to know what’s going to be bad and staying away right?

This was and still is my biggest learning experience with financial statements. Getting beyond the numbers and trying to understand how the numbers provides an indication of the future.

Regarding the spider graphs, I just manually entered all the values so I hope it is accurate otherwise my research and understanding is way off

“Cash flow is calculated by adding and subtracting certain items to the net income. These adjustments must be made because non-cash items may be included into the net income even though it does not represent any cash in the bank. e.g. You sell an item with a condition that the buyer can use it for 30 days, and if they like it, they pay for it. Otherwise they return it during the 30 day period without paying anything. In this case, accounts receivables will go up which makes it seem like the assets have increased, but in cash terms, you did not receive a single cent. Thus the importance of seeing how this number is stated in the statements.”

My understanding is that Net Sales is the Total Revenue generated by a business therefore making Net Sales also known as Total Revenue and that Net Sales is also the Gross Sales minus returns, discounts, and allowances. Since ‘Gross Sales’ isn’t reported and Net Sales is and is often referred to as Total Revenue those deductions that you bring up in your article have already been accounted for in the Total Revenue (AKA Net Sales) figure. So, you shouldn’t have to look for situations in which someone may return an item because its already been reported in the Total Revenue figure. And also that this is a GAAP rule to accounting so the conditions aren’t different from industry to industry.

That has been my understanding for a long time and there are many definitions circling on the web that would point to the same conclusion. I actually can’t find one article that points to any other argument than the one I’ve presented. Maybe you could shed some light.

This is a very good example

Great Job!

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@ Miguel,
Sure. Even if 1 person asks, I’ll comply Just need to concentrate on working on the Forbes companies. Been getting stuck on other things at the moment.

Thanks for the walk through. I would love to see you go through the income statement & balance sheet (if you have the time).

Miguel Barbosa
http://www.simoleonsense.com

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