4.2 Cash Flow Statement

The cash flow statement indicates the movement of cash through the organization, including operating, investing and financing activities. The annual report's cash flow statement shows the change in the amount of cash from the previous year. The proforma cash flow statement indicates the expected change at the end of the upcoming year.

4.3 Income Statement

Your company can use the income statement to diagnose problems on a product by product basis.

Sales for each product are reported in dollars (not the number of products). Subtracting variable costs from sales determines the contribution margin. Inventory carrying costs are driven by the number of products in the warehouse. If your company has $0 inventory carrying costs, you stocked out of the product and most likely missed sales opportunities. If your company has excessive inventory, your carrying costs will be high. Sound sales forecasts matched to reasonable production schedules will result in a modest inventory carrying costs (see 9. FORECASTING).

Period costs are depreciation added to Sales, General and Administration (SG&A) costs, which include R&D, Promotion, Sales and Admin expenses. Period costs are subtracted from the contribution margin to determine the net margin.

The net margin for all products is totaled then subtracted from other expenses, which in the simulation include fees, write-offs and, if it is enabled, TQM/Sustainability costs. This determines earnings before interest and taxes, or EBIT. Finally, interest, taxes and profit sharing costs are subtracted to determine net profit.

Depreciation

Depreciation is an accounting principle that allows companies to reduce the value of their fixed assets. Each year some of the value is “used up.” Depreciation decreases the firm's tax liability by reducing net profits while providing a more accurate picture of the company's plant and equipment value. Depreciation is expensed, product by product, on the income statement.

Total depreciation for the period is reflected as a gain on the cash flow statement. On the balance sheet, accumulated depreciation is subtracted from the value of the plant & equipment. Capstone® uses a straight line depreciation method calculated over fifteen years.

The proforma menu also links to projected Financial Ratios and, if your instructor has enabled it, a projected Balanced Scorecard (see 11 Balanced Scorecard ).

Tip: After finalizing your decisions, use the printer icon in the spreadsheet to print your proforma income statement. When the simulation advances to the next year, compare the proforma income statement to the results in the annual report income statement.