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Analysis for
Financial Management
The McGraw-Hill Education Series in Finance,
Insurance, and Real Estate
FINANCIAL MANAGEMENT Fundamentals of Corporate Finance INTERNATIONAL FINANCE

Block, Hirt, and Danielsen Thirteenth Edition Eun and Resnick
Foundations of Financial Management Shefrin International Financial Management
Eighteenth Edition Behavioral Corporate Finance: Ninth Edition
Brealey, Myers, and Allen Decisions that Create Value
REAL ESTATE
Second Edition
Principles of Corporate Finance Brueggeman and Fisher
Fourteenth Edition INVESTMENTS Real Estate Finance and Investments
Brealey, Myers, and Marcus Bodie, Kane, and Marcus Seventeenth Edition
Fundamentals of Corporate Finance Essentials of Investments Ling and Archer
Eleventh Edition Twelfth Edition Real Estate Principles: A Value
Brooks Bodie, Kane, and Marcus Approach
FinGame Online 5.0 Investments Sixth Edition
Bruner, Eades, and Schill Twelfth Edition
FINANCIAL PLANNING AND
Case Studies in Finance: Managing Hirt and Block INSURANCE
for Corporate Value Creation Fundamentals of Investment Allen, Melone, Rosenbloom, and
Eighth Edition Management Mahoney
Cornett, Adair, and Nofsinger Tenth Edition Retirement Plans: 401(k)s, IRAs,
Jordan, Miller, and Dolvin and Other Deferred Compensation
Finance: Applications and Theory
Approaches
Sixth Edition Fundamentals of Investments:
Valuation and Management Twelfth Edition
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Ninth Edition Altfest
M: Finance
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Fifth Edition Second Edition
Derivatives: Principles and Practice
DeMello Harrington and Niehaus
Second Edition
Cases in Finance Risk Management and Insurance
Third Edition FINANCIAL INSTITUTIONS AND
MARKETS Second Edition
Higgins, Koski, and Mitton Kapoor, Dlabay, Hughes, and Hart
Rose and Hudgins
Analysis for Financial Management Focus on Personal Finance: An active
Bank Management and Financial
Thirteenth Edition Services approach to help you achieve financial
Ross, Westerfield, Jaffe, and Jordan literacy
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Seventh Edition
Corporate Finance Rose and Marquis
Kapoor, Dlabay, Hughes, and Hart
Twelfth Edition Financial Institutions and Markets
Personal Finance
Ross, Westerfield, Jaffe, and Jordan Eleventh Edition
Fourteenth Edition
Corporate Finance: Core Principles Saunders and Cornett
and Applications Walker and Walker
Financial Institutions Management:
Sixth Edition A Risk Management Approach Personal Finance: Building Your
Future
Ross, Westerfield, and Jordan Tenth Edition
Second Edition
Essentials of Corporate Finance Saunders and Cornett
Eleventh Edition Financial Markets and Institutions
Ross, Westerfield, and Jordan Eighth Edition
Analysis for
Financial Management
Thirteenth Edition
ROBERT C. HIGGINS
Marguerite Reimers
Emeritus Professor of Finance
The University of Washington
with
JENNIFER L. KOSKI
Associate Dean for Academic and
Faculty Affairs
Kirby L. Cramer Endowed Chair
in Finance
The University of Washington
and
TODD MITTON
Ned C. Hill Professor of Finance
Brigham Young University
Final PDF to printer
ANALYSIS FOR FINANCIAL MANAGEMENT

Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10019. Copyright
©2023 by McGraw Hill LLC. All rights reserved. Printed in the United States of America. No part
of this publication may be reproduced or distributed in any form or by any means, or stored in a
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not limited to, in any network or other electronic storage or transmission, or broadcast for distance
learning.
Some ancillaries, including electronic and print components, may not be available to customers
outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 LCR 27 26 25 24 23 22
ISBN 978-1-265-04263-9
MHID 1-265-04263-2
Cover Image: Dave Allen Photography/Shutterstock
All credits appearing on page or at the end of the book are considered to be an extension of the
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The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a
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LLC does not guarantee the accuracy of the information presented at these sites.
mheducation.com/highered
hig42632_fm_ise.indd iv 12/06/21 08:07 PM

In memory of our sons
STEVEN HIGGINS
1970–2007
ALEXANDER MITTON
1997–2014
Brief Contents
Preface xii PART FOUR

Evaluating Investment Opportunities 235
PART ONE 7 Discounted Cash Flow
Assessing the Financial Techniques 237
Health of the Firm 1
8 Risk Analysis in Investment
1 Interpreting Financial Statements 3 Decisions 285
2 Evaluating Financial Performance 37 9 Business Valuation and Corporate
Restructuring 335
PART TWO
Planning Future Financial Performance 77 GLOSSARY 385
3 Financial Forecasting 79 SUGGESTED ANSWERS TO
4 Managing Growth 111 ODD-NUMBERED
PROBLEMS 397
PART THREE INDEX 429
Financing Operations 139
5 Financial Instruments and Markets 141
6 The Financing Decision 193
Contents
Preface xii The Value Problem 56

ROE or Market Price? 58
Ratio Analysis 60
PART ONE Using Ratios Effectively 61
ASSESSING THE FINANCIAL Ratio Analysis of Polaris Inc. 62
HEALTH OF THE FIRM 1 Summary 69
Additional Resources 70
Chapter 1 Problems 71
Interpreting Financial Statements 3
The Cash Flow Cycle 3 PART TWO
Overview of Financial Statements 6 PLANNING FUTURE FINANCIAL
The Balance Sheet 9 PERFORMANCE 77
Current Assets and Liabilities 10
Shareholders’ Equity 11 Chapter 3
The Income Statement 11 Financial Forecasting 79
Measuring Earnings 12
Sources and Uses Statements 16 Pro Forma Statements 79
The Two-Finger Approach 17 Percent-of-Sales Forecasting 80
The Cash Flow Statement 18 Interest Expense 86
Financial Statements and the Value Problem 22 Seasonality 86
Market Value vs. Book Value 22 Pro Forma Statements and Financial
Economic Income vs. Accounting Income 26 Planning 87
Imputed Costs 27 Forecasting with Spreadsheets 89
Summary 30 Coping with Uncertainty 92
Additional Resources 31 Sensitivity Analysis 92
Problems 32 Scenario Analysis 93
Simulation 93
Chapter 2 Cash Flow Forecasts 95
Evaluating Financial Performance 37 Cash Budgets 96
The Techniques Compared 100
The Levers of Financial Performance 37 Summary 101
Return on Equity 38 Additional Resources 102
The Three Determinants of ROE 38 Problems 103
The Profit Margin 40
Asset Turnover 42 Chapter 4
Financial Leverage 48
Managing Growth 111
Is ROE a Reliable Financial Yardstick? 53
The Timing Problem 54 Sustainable Growth 112
The Risk Problem 54 The Sustainable Growth Equation 112
viii
Contents ix
Too Much Growth 114 Efficient Markets 166

Balanced Growth 115 What Is an Efficient Market? 166
DLH Holdings’ Sustainable Growth Rate 116 Implications of Efficiency 169
“What If” Questions 118 Appendix
What to Do When Actual Growth Exceeds Using Derivatives to Manage Risks 170
Sustainable Growth 118 Forward Markets 172
Sell New Equity 119 Hedging with Forward Contracts 172
Increase Leverage 121 Hedging with Futures Contracts 173
Reduce the Payout Ratio 121 Types of Forwards and Futures 174
Profitable Pruning 122 Hedging with Swaps 175
Outsourcing 122 Interest Rate Swaps 176
Pricing 123 Currency Swaps 177
Is Merger the Answer? 123 Hedging with Options 178
Too Little Growth 123 Limitations of Financial Market Hedging 181
What to Do When Sustainable Growth Exceeds Valuing Options 182
Actual Growth 124 Summary 185
Ignore the Problem 125 Additional Resources 187
Return the Money to Shareholders 126 Problems 188
Buy Growth 127
Sustainable Growth and Pro Forma
Chapter 6
Forecasts 127
New Equity Financing 128 The Financing Decision 193
Why Don’t U.S. Corporations Issue Financial Leverage 195
More Equity? 131 Measuring the Effects of Leverage on a
Summary 132 Business 199
Additional Resources 133 Leverage and Risk 201
Problems 134 Leverage and Earnings 203
How Much to Borrow 206
PART THREE Irrelevance 206
Tax Benefits 208
FINANCING OPERATIONS 139 Distress Costs 208
Flexibility 213
Chapter 5
Market Signaling 216
Financial Instruments and Management Incentives 219
Markets 141 The Financing Decision and
Financial Instruments 142 Growth 219
Bonds 143 Selecting a Maturity Structure 222
Common Stock 149 Inflation and Financing Strategy 223
Preferred Stock 153 Appendix
Financial Markets 155 The Irrelevance Proposition 223
Venture Capital Financing 155 No Taxes 224
Private Equity 157 Taxes 226
Initial Public Offerings 158 Summary 227
Seasoned Issues 160 Additional Resources 228
Issue Costs 164 Problems 230
x Contents
PART FOUR Estimating Investment Risk 291

Three Techniques for Estimating
EVALUATING INVESTMENT
Investment Risk 292
OPPORTUNITIES 235
Including Risk in Investment
Chapter 7 Evaluation 293
Discounted Cash Flow Techniques 237 Risk-Adjusted Discount Rates 293
The Cost of Capital 294
Figures of Merit 238
The Cost of Capital Defined 295
The Payback Period and the Accounting
The Cost of Capital for Polaris 296
Rate of Return 239
The Cost of Capital in Investment
The Time Value of Money 240
Appraisal 304
Equivalence 245
Multiple Hurdle Rates 304
The Net Present Value 246
Four Pitfalls in the Use of Discounted
The Benefit-Cost Ratio 248
The Internal Rate of Return 248
Cash Flow Techniques 307
The Enterprise Perspective vs. the Equity
Uneven Cash Flows 252
Perspective 307
A Few Applications and Extensions 253
Inflation 310
Mutually Exclusive Alternatives and
Capital Rationing 256 Real Options 311
The IRR in Perspective 257 Excessive Risk Adjustment 316
Determining the Relevant Cash Flows 258 A Cautionary Note 318
Depreciation 260 Appendix
Working Capital and Spontaneous Asset Beta and Adjusted Present
Sources 262 Value 318
Sunk Costs 263 Calculating Asset Beta 319
Allocated Costs 264 Using Asset Beta to Estimate Equity
Cannibalization 265 Beta 320
Excess Capacity 266 Asset Beta and Adjusted Present Value 321
Financing Costs 267 Summary 325
Appendix Additional Resources 326
Mutually Exclusive Alternatives and Problems 327
Capital Rationing 269
What Happened to the Other $578,000? 270 Chapter 9
Unequal Lives 271 Business Valuation and Corporate
Capital Rationing 274 Restructuring 335
The Problem of Future Opportunities 275
Valuing a Business 337
A Decision Tree 276
Assets or Equity? 338
Summary 277
Dead or Alive? 338
Additional Resources 278
Minority Interest or Control? 340
Problems 278
Discounted Cash Flow Valuation 341
Chapter 8 Free Cash Flow 342
The Terminal Value 343
Risk Analysis in Investment Decisions 285 A Numerical Example 346
Risk Defined 287 Problems with Present Value
Risk and Diversification 289 Approaches to Valuation 348
Contents xi
Valuation Based on Comparable Trades 349 The Venture Capital Method—Multiple Financing
Lack of Marketability 353 Rounds 372
The Market for Control 354 Why Do Venture Capitalists Demand Such High
The Premium for Control 354 Returns? 374
Financial Reasons for Restructuring 357 Summary 375
The Empirical Evidence 364 Additional Resources 376
The LinkedIn Buyout 366 Problems 378
Appendix
Glossary 385
The Venture Capital Method of
Valuation 368 Suggested Answers to
The Venture Capital Method—One Financing Odd-Numbered Problems 397
Round 369 Index 429
Preface
Like its predecessors, the thirteenth edition of Analysis for Financial Management
is for nonfinancial executives and business students interested in the practice of
financial management. It introduces standard techniques and recent advances
in a practical, intuitive way. The book assumes no prior background beyond a
rudimentary and perhaps rusty familiarity with financial statements—although
a healthy curiosity about what makes business tick is also useful. Emphasis
throughout is on the managerial implications of financial analysis.
Analysis for Financial Management should prove valuable to individuals
interested in sharpening their managerial skills and to executive program partic-
ipants. The book has also found a home in university classrooms as the sole text
in Executive MBA and applied finance courses, as a companion text in case-
oriented courses, and as supplementary reading in more theoretical courses.
Analysis for Financial Management is our attempt to translate into another
medium the enjoyment and stimulation we have received over many years
working with executives and college students. This experience has convinced
us that financial techniques and concepts need not be abstract or obtuse; that
significant advances in the field, such as agency theory, market signaling,
market efficiency, capital asset pricing, and real options analysis, are impor-
tant to practitioners; and that finance has much to say about the broader
aspects of company management. We are also convinced that any activity in
which so much money changes hands so quickly cannot fail to be interesting.
Part One looks at the management of existing resources, including the use of
financial statements and ratio analysis to assess a company’s financial health,
its strengths, weaknesses, recent performance, and future prospects. Emphasis
throughout is on the ties between a company’s operating activities and its finan-
cial performance. A recurring theme is that a business must be viewed as an
integrated whole and that effective financial management is possible only within
the context of a company’s broader operating characteristics and strategies.
The rest of the book deals with the acquisition and management of new
resources. Part Two examines financial forecasting and planning, with par-
ticular emphasis on managing growth and decline. Part Three considers the
financing of company operations, including a review of the principal security
types, the markets in which they trade, and the proper choice of security type
by the issuing company. The latter requires a close look at financial leverage
and its effects on the firm and its shareholders.
Part Four addresses the use of discounted cash flow techniques, such as
the net present value and the internal rate of return, to evaluate investment
opportunities. It also deals with the difficult task of incorporating risk into
xii
Preface xiii
investment appraisal. The book concludes with an examination of business

valuation and company restructuring within the context of the ongoing debate
over the proper roles of shareholders, boards of directors, and incumbent
managers in governing America’s public corporations.
An extensive glossary of financial terms and suggested answers to odd-
numbered, end-of-chapter problems follow the last chapter.
Changes in the Thirteenth Edition

Noteworthy changes and refinements in the thirteenth edition include:
∙ Updated discussions of adjusted earnings and International Financial
Reporting Standards in Chapter 1.
∙ Application in Chapter 3 of Argo, a new, free Excel add-in for implementing
simulation analyses to financial forecasting.
∙ Inclusion of a discussion of Special Purpose Acquisition Companies
(SPACs) in Chapter 5, in the context of trends in raising capital.
∙ Expanded discussion of the underinvestment problem for corporate invest-
ments and its consequences for the capital structure decision in Chapter 6.
∙ Updated discussions of tax inversions, EPS dilution, and research on
merger performance in Chapter 9.
∙ Use of Polaris, Inc., a leading producer of snowmobiles, all-terrain vehi-
cles, motorcycles, and boats, as an extended example throughout the book.
A word of caution: Analysis for Financial Management emphasizes the appli-
cation and interpretation of analytic techniques in decision making. These tech-
niques have proved useful for putting financial problems into perspective and for
helping managers anticipate the consequences of their actions. However, tech-
niques can never substitute for thought. Even with the best technique, it is still
necessary to define and prioritize issues, to modify analysis to fit specific cir-
cumstances, to strike the proper balance between quantitative analysis and more
qualitative considerations, and to evaluate alternatives insightfully and creatively.
Mastery of technique is only the necessary first step toward effective management.
The ability to access current Compustat data continues to be a great help
in providing timely examples of current practice. We also owe a large thank
you to the following people for their insightful reviews of the twelfth edition
and their constructive advice. They did an excellent job. Any remaining short-
comings are ours, not theirs.
Buleny Aybar, Southern New Hampshire University
Janet L. Bartholow, Limestone University
Dennis Burke, Coker University
Deanne Butchey, Florida International University
xiv Preface
Steven Droll, Bethel University

Steven Wei Ho, Columbia University
Leon Hutton, University of Maryland Global Campus
David Ikenberry, University of Colorado Boulder
Jaemin Kim, San Diego State University
Jonathan Newman, Bryan College
Thanh Nguyen, University of South Carolina-Upstate
Patrice Nybro, American Intercontinental University
Christopher Palmer, MIT
Micki Pitcher, Davenport University
Wenbin Tang, Shenandoah University
Arthur Wilson, George Washington University
Jack Wolf, Clemson University
Nikhil Varaiya, San Diego State University
Stephanie Yates, University of Alabama at Birmingham
Lili Zhu, Shenandoah University
We appreciate the exceptional direction provided by Barb Hari, Chuck

Synovec, Michele Janicek, and Harvey Yep of McGraw-Hill on the develop-
ment, design, and editing of the book. We thank Paige Nelson for her thor-
ough review of the end-of-chapter problems for this edition. David Beim,
Dave Dubofsky, George Parker, Megan Partch, and Alan Shapiro have our
continuing gratitude for their insightful help and support throughout the
book’s evolution. Finally, we want to express our appreciation to students
and colleagues at the University of Washington, Brigham Young University,
Stanford University, IMD, The Darden School, The Pacific Coast Banking
School, The Koblenz Graduate School of Management, The Gordon Institute
of Business Science, Boeing, and Microsoft, among others, for stimulating
our continuing interest in the practice and teaching of financial management.
We envy you learning this material for the first time. It’s a stimulating
intellectual adventure.
Robert C. (Rocky) Higgins Todd Mitton

Marguerite Reimers Emeritus Professor of Finance Ned C. Hill Professor of Finance
Foster School of Business Marriott School of Business
University of Washington Brigham Young University
rhiggins@uw.edu todd.mitton@byu.edu
Jennifer L. Koski
Associate Dean for Academic and Faculty Affairs
Kirby L. Cramer Endowed Chair in Finance
Foster School of Business
University of Washington
jkoski@uw.edu
Final PDF to printer
Preface xv
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Preface xvii
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P A R T O N E
Assessing the Financial

Health of the Firm
C H A P T E R O N E
Interpreting Financial
Statements
Financial statements are like fine perfume; to be sniffed but not

swallowed.
Abraham Briloff
Accounting is the scorecard of business. It translates a company’s diverse

activities into a set of objective numbers that provide information about the
firm’s performance, problems, and prospects. Finance involves the interpre-
tation of these accounting numbers for assessing performance and planning
future actions.
The skills of financial analysis are important to a wide range of people,
including investors, creditors, and regulators. But nowhere are they more
important than within the company. Regardless of functional specialty or
company size, managers who possess these skills are able to diagnose their
firm’s ills, prescribe useful remedies, and anticipate the financial conse-
quences of their actions. Like a ballplayer who cannot keep score, an operat-
ing manager who does not fully understand accounting and finance works
under an unnecessary handicap.
This and the following chapter look at the use of accounting information
to assess financial health. We begin with an overview of the accounting prin-
ciples governing financial statements and a discussion of one of the most
abused and confusing notions in finance: cash flow. Two recurring themes
will be that defining and measuring profits is more challenging than one
might expect, and that profitability alone does not guarantee success, or even
survival. In Chapter 2, we look at measures of financial performance and
ratio analysis.
The Cash Flow Cycle

Finance can seem arcane and complex to the uninitiated. However, a com-
paratively few basic principles should guide your thinking. One is that a
company’s finances and operations are integrally connected. A company’s
4 Part One Assessing the Financial Health of the Firm
FIGURE 1.1 The Cash Flow–Production Cycle

es
y iti
quit iabil
ne nl ds
si si
n ge nge es rest iden
h a ha ax nte iv
C C T I D
Coll
Cash ecti
t on
en of
c
stm r
n
ed
tio
ve
Ca
it
In
uc
sal
sh
od
sa
Pr
es
le
s
Accounts
Fixed assets
receivable
De
les
pr
iat
ec
it
sa
ion
ed
Inventory Cr
activities, method of operation, and competitive strategy all fundamentally

shape the firm’s financial structure. The reverse is also true: Decisions that
appear to be primarily financial in nature can significantly affect company
operations. For example, the way a company finances its assets can affect the
nature of the investments it is able to undertake in future years.
The cash flow–production cycle shown in Figure 1.1 illustrates the close
interplay between company operations and finances. For simplicity, suppose
the company shown is a new one that has raised money from owners and
creditors, has purchased productive assets, and is now ready to begin opera-
tions. To do so, the company uses cash to purchase raw materials and hire
workers; with these inputs, it makes the product and stores it temporarily in
inventory. Thus, what began as cash is now physical inventory. When the
company sells an item, the physical inventory changes back into cash. If the
sale is for cash, this occurs immediately; otherwise, cash is not realized until
some later time when the account receivable is collected. This simple move-
ment of cash to inventory, to accounts receivable, and back to cash is the
firm’s operating, or working capital, cycle.
Another ongoing activity represented in Figure 1.1 is investment. Over a
period of time, the company’s fixed assets are consumed, or worn out, in the
Chapter 1 Interpreting Financial Statements 5
creation of products. It is as though every item passing through the business

takes with it a small portion of the value of fixed assets. The accountant recog-
nizes this process by continually reducing the accounting value of fixed assets
and increasing the value of merchandise flowing into inventory by an amount
known as depreciation. To maintain productive capacity and to finance addi-
tional growth, the company must invest part of its newly received cash in new
fixed assets. The object of this whole exercise, of course, is to ensure that
the cash returning from the working capital cycle and the investment cycle
exceeds the amount that started the journey.
We could complicate Figure 1.1 further by including accounts payable and
expanding on the use of debt and equity to generate cash, but the figure already
demonstrates two basic principles. First, financial statements are an impor-
tant window on reality. A company’s operating policies, production tech-
niques, and inventory and credit-control systems fundamentally determine
the firm’s financial profile. If, for example, a company requires payment on
credit sales to be more prompt, its financial statements will reveal a reduced
investment in accounts receivable and possibly a change in its revenues and
profits. This linkage between a company’s operations and its finances is our
rationale for studying financial statements. We seek to understand company
operations and predict the financial consequences of changing them.
The second principle illustrated in Figure 1.1 is that profits do not equal
cash flow. Cash—and the timely conversion of cash into inventories, accounts
receivable, and back into cash—is the lifeblood of any company. If this cash
flow is severed or significantly interrupted, insolvency can occur. Yet the
fact that a company is profitable is no assurance that its cash flow will be
sufficient to maintain solvency. To illustrate, suppose a company loses con-
trol of its accounts receivable by allowing customers more and more time to
pay, or suppose the company consistently makes more merchandise than it
sells. Then, even though the company is selling merchandise at a profit in the
eyes of an accountant, its sales may not be generating sufficient cash soon
enough to replenish the cash outflows required for production and invest-
ment. When a company has insufficient cash to pay its maturing obligations,
it is insolvent. As another example, suppose the company is managing its
inventory and receivables carefully, but rapid sales growth is necessitating
an ever-larger investment in these assets. Then, even though the company is
profitable, it may have too little cash to meet its obligations. The company
will literally be “growing broke.” These brief examples illustrate why a man-
ager must be concerned at least as much with cash flows as with profits.
To explore these themes in more detail and to sharpen your skills in using
accounting information to assess performance, we need to review the basics
of financial statements. If this is your first look at financial accounting, buckle
up because we will be moving quickly. If the pace is too quick, take a look at
one of the accounting texts recommended at the end of the chapter.
Overview of Financial Statements

The most important source of information for evaluating the financial health
of a company is its set of financial statements, consisting principally of a bal-
ance sheet, an income statement, and a cash flow statement. Although these
statements can appear complex at times, they all rest on a very simple founda-
tion. To understand this foundation and to see the ties among the three state-
ments, let us look briefly at each.
A balance sheet is a financial snapshot, taken at a point in time, of all the
assets the company owns and all the claims against those assets. The basic
relationship, and indeed the foundation for all of accounting, is
Assets = Liabilities + Shareholders’ equity
It is as if a herd (flock? column?) of accountants runs through the business on
the appointed day, making a list of everything the company owns, and assign-
ing each item a value. After tabulating the firm’s assets, the accountants list
all outstanding company liabilities, where a liability is simply an obligation to
deliver something of value in the future—or more colloquially, some form of
an “IOU.” Having thus totaled up what the company owns and what it owes,
the accountants call the difference between the two shareholders’ equity.
Shareholders’ equity is the accountant’s estimate of the value of the share-
holders’ investment in the firm, just as the value of a homeowners’ equity is
the value of the home (the asset), less the mortgage outstanding against it (the
liability). Shareholders’ equity is also known variously as owners’ equity,
stockholders’ equity, net worth, or simply equity.
It is important to realize that the basic accounting equation holds for indi-
vidual transactions, as well as for the firm as a whole. When a firm pays $1
million in wages, cash declines $1 million and shareholders’ equity falls by
the same amount. Similarly, when a company borrows $100,000, cash rises
$100,000, as does a liability named something like loans outstanding. And
when a company receives a $10,000 payment from a customer, cash rises
while another asset, accounts receivable, falls by the same figure. In each
instance, the double-entry nature of accounting guarantees that the basic
accounting equation holds for each transaction, and when summed across all
transactions, it holds for the company as a whole.
To see how the repeated application of this single formula underlies the cre-
ation of company financial statements, consider Worldwide Sports (WWS),
a newly founded retailer of value-priced sporting goods. In January 2021,
the founder invested $150,000 of his personal savings and added another
$100,000 borrowed from relatives to start the business. After buying furniture
and display fixtures for $60,000 and merchandise for $80,000, WWS was
ready to open its doors.
The following six transactions summarize WWS’s activities over the

course of its first year.
∙ Sold $900,000 of sports equipment, receiving $875,000 in cash, with
$25,000 still to be paid.
∙ Paid $190,000 in wages, including the owners’ salary.
∙ Purchased $380,000 of merchandise at wholesale, with $20,000 still owed to
suppliers, and $30,000 worth of product still in WWS’s inventory at year-end.
∙ Spent $210,000 on other expenses, such as utilities and rent.
∙ Depreciated furniture and fixtures by $15,000.
∙ Paid $10,000 interest on WWS’s loan from relatives and another $40,000
in income taxes to the government.
Table 1.1 shows how an accountant would record these transactions.
WWS’s beginning balance, the first line in the table, shows cash of $250,000,
a loan of $100,000, and equity of $150,000. But these numbers change
quickly as the company buys fixtures and an initial inventory of merchandise.
And they change further as each of the listed transactions occurs.
Abstracting from the accounting details, there are two important things to
note here. First, the basic accounting equation holds for each transaction. For
every line in the table, assets equal liabilities plus owners’ equity. Second,
WWS’s year-end balance sheet across the bottom of the table is just its begin-
ning balance sheet plus the cumulative effect of the individual transactions.
For example, ending cash on December 31, 2021 is the beginning cash of
TABLE 1.1 Worldwide Sports Financial Transactions 2021 ($ thousands)

Assets = Liabilities + Equity
Accounts Fixed Accounts Loan from Owners’
Cash Receivable Inventory Assets = Payable Relatives Equity
Beginning Balance 1/1/21 $ 250 = $100 $ 150
Initial purchases (140) 80 60 =
Sales 875 25 = 900
Wages (190) = (190)
Merchandise purchases (360) 30 = 20 (350)
Other expenses (210) = (210)
Depreciation (15) = (15)
Interest payment (10) = (10)
Income tax payment (40) = (40)
Ending Balance 12/31/21 $ 175 $25 $110 $ 45 = $20 $100 $ 235
$250,000 plus or minus the cash involved in each transaction. Incidentally,

WWS’s first year appears to have been a decent one: Owners’ equity is up
$85,000 over the year, on top of whatever the owner paid himself in salary.
To further convince you that the bottom row of Table 1.1 really is a bal-
ance sheet, the following table presents the same information in a more con-
ventional format.
Worldwide Sports Balance Sheet, December 31, 2021 ($ thousands)
Cash $175 Accounts payable $ 20
Accounts receivable 25 Total current liabilities 20
Inventory 110 Loan from relatives 100
Total current assets 310 Equity 235
Fixed assets 45 Total liabilities and
Total assets $355 Owners’ equity $355
If a balance sheet is a snapshot in time, the income statement and the cash
flow statement are videos, highlighting changes in two especially important
balance sheet accounts over time. Business owners are naturally interested
in how company operations have affected the value of their investment. The
income statement addresses this question by partitioning the recorded changes
in owners’ equity into revenues and expenses, where revenues increase
owners’ equity and expenses reduce it. The difference between revenues and
expenses is earnings, or net income.
Looking at the right-most column in Table 1.1, WWS’s 2021 income state-
ment looks like this. Note that the $85,000 net income appearing at the bot-
tom of the statement equals the change in owners’ equity over the year.
Worldwide Sports Income Statement, 2021 ($ thousands)
Sales $900
Wages 190
Merchandise purchases 350
Depreciation 15
Gross profit $345
Other expenses 210
Interest expense 10
Income before tax $125
Income taxes 40
Net income $ 85
The focus of the cash flow statement is solvency, having enough cash in the
bank to pay bills as they come due. The cash flow statement provides a detailed
look at changes in the company’s cash balance over time. As an organizing
principle, the statement segregates changes in cash into three broad categories:
cash provided (or consumed) by operating activities, by investing activities,
and by financing activities. Figure 1.2 is a simple schematic diagram showing
the close conceptual ties among the three principal financial statements.
FIGURE 1.2 Ties among Financial Statements

Assets at beginning = Liabilities at beginning + Equity at beginning
Cash Shareholders' Equity
Cash flow Income

statement statement
Financing
Operating
Revenues
Expenses
Investing
Balance
sheets
Assets at end = Liabilities at end + Equity at end
The Balance Sheet

We will now take a more in-depth look at each of the key financial statements
See polaris.com. Follow in turn, beginning with the balance sheet. To illustrate the techniques and
Company > Investors >
Financials & Filings for
concepts presented throughout the book, I will refer whenever possible to
financial statements. Polaris Inc., the self-styled “Global leader in Powersports” including snow-
mobiles, all-terrain vehicles (ATVs), motorcycles, and boats. In addition to
the United States, Polaris has manufacturing operations in China, France,
Mexico, and Poland. It has offices in 14 countries and sells its products in
over 100 countries, although 80 percent of sales originate in the United States.
The company’s focus, as embodied in its marketing tagline “Think Outside”
is to create products that enhance the experience of outdoor enthusiasts.
Headquartered in Medina, Minnesota, a small town outside of Minne-
apolis, Polaris has $7 billion in annual sales, and its stock trades on the
New York Stock Exchange. The firm was founded in 1954 as one of the
pioneers of the snowmobile industry. In the 1980s, Polaris diversified into
off-road vehicles when they produced the first American-made ATVs. In
2011, Polaris extended its reach into on-road vehicles with its acquisition
of the legendary Indian Motorcycle company. Between 2018 and 2019, two
more acquisitions added three well-known boat brands to Polaris’s prod-
uct portfolio. Polaris’s recent ventures include forays into electric ATVs,
electric motorcycles, and special-purpose electric automobiles. In 2020,
64 percent of Polaris’s sales came from snowmobiles and off-road vehi-
cles, with 9 percent coming from boats, 8 percent from motorcycles, and
19 percent from other products and services.
Table 1.2 presents Polaris’s balance sheets for 2019 and 2020. If the precise
meaning of every asset and liability category in Table 1.2 is not immediately
apparent, be patient. We will discuss many of them in the following text. In addi-
tion, all of the accounting terms used appear in the glossary at the end of the book.
Polaris Inc.’s balance sheet equation for 2020 is

Assets = Liabilities + Shareholders’ equity
                   
$4,922 million = $3,488 million + $1,434 million
Current Assets and Liabilities

By convention, U.S. accountants list assets and liabilities on the balance sheet in
order of decreasing liquidity, where liquidity refers to the speed with which an
item can be converted to cash. Thus, cash, marketable securities, and accounts
receivable appear at the top, while land, plant, and equipment are toward the
bottom. Similarly on the liabilities side, short-term loans and accounts payable
are toward the top, while shareholders’ equity is at the bottom.
TABLE 1.2 Polaris Inc. Balance Sheets ($ millions)*

Source: Polaris annual reports
December 31 Change in
2019 2020 Account
Assets
Cash and cash equivalents $ 157 $ 544 $ 387
Accounts receivable 190 257 67
Inventories 1,121 1,178 57
Other current assets 158 138 (20)
Total current assets 1,627 2,117
Gross property, plant, and equipment 2,004 2,142 138
Less accumulated depreciation and amortization 994 1,128 134
Net property, plant, and equipment 1,010 1,014 4
Goodwill and other intangible assets 1,490 1,463 (27)
Other assets 303 327 24
Total assets $ 4,431 $4,922
Liabilities and Shareholders’ Equity
Debt due in one year 167 142 (25)
Accounts payable 450 782 332
Accrued liabilities 870 908 38
Other current liabilities 41 57 16
Total current liabilities 1,528 1,889
Long-term debt 1,512 1,294 (218)
Other long-term liabilities 282 305 23
Total liabilities 3,322 3,488
Common stock 1 1
Additional paid-in capital 893 984
Retained earnings 215 449
Total shareholders’ equity 1,108 1,434 326
Total liabilities and shareholders’ equity $ 4,431 $4,922
*Totals may not add due to rounding.

Accountants also arbitrarily define any asset or liability that is expected to

turn into cash within one year as current and all others assets and liabilities as
long term. Inventory is a current asset because there is reason to believe it will
be sold and will generate cash within one year. Accounts payable are short-term
liabilities because they must be paid within one year. Note that over 40 percent
of Polaris’s assets are current, a fact we will say more about in the next chapter.
A Word to the Unwary

Nothing puts a damper on a good financial discussion (if such exists) faster than the sug-
gestion that if a company is short of cash, it can always spend some of its shareholders’
equity. Equity is on the liabilities side of the balance sheet, not the asset side. It represents
owners’ claims against existing assets. In other words, that money has already been spent.
Shareholders’ Equity
The different accounts appearing in the shareholders’ equity portion of the
balance sheet can often be a source of confusion. Polaris has three equity
accounts: common stock, additional paid-in capital, and retained earnings
(see Table 1.2). Unless forced to do otherwise, my advice is to forget these
distinctions. They keep accountants and attorneys employed, but seldom
make much practical difference. As a first cut, just add up everything that is
not an IOU and call it shareholders’ equity.
The Income Statement

Polaris’s income statements for 2019 and 2020 are presented in Table 1.3.
Looking at Polaris’s operating performance in 2020, the basic income state-
ment relation appearing in Table 1.3 is:
Revenues – Expenses = Net

income
Net sales – Cost of – Operating – Nonoperating – Taxes = Net
goods sold expenses expenses income
$7,108 – $5,057 – $1,460 – $71 – $107 = $414
Net income records the extent to which net sales generated during the account-
ing period exceeded expenses incurred in producing the sales. For variety,
net income is also commonly referred to as earnings or profits, frequently
with the word net stuck in front of them; net sales are often called revenues
or net revenues; and cost of goods sold is sometimes labeled cost of sales.
I have never found a meaningful distinction between these terms. Why so
many words to say the same thing? My personal belief is that accountants are
TABLE 1.3 Polaris Inc. Income Statements ($ millions)*

Source: Polaris annual reports and Compustat
January 1 to December 31
2019 2020
Net sales $6,863 $7,108
Cost of goods sold 4,899 5,057
Gross profit 1,964 2,051
Selling, general, and administrative expenses 953 904
Research and development 293 296
Depreciation and amortization 235 261
Total operating expenses 1,481 1,460
Operating income 484 592
Interest expense 78 67
Other nonoperating expense (income) (2) 4
Total nonoperating expenses 76 71
Income before income taxes 408 521
Provision for income taxes 84 107
Net income $ 324 $ 414
so rule-bound in their calculations of the various amounts that their creativity

runs a bit amok when it comes to naming them.
Income statements are commonly divided into operating and nonoperat-
ing segments. As the names imply, the operating segment reports the results
of the company’s major, ongoing activities, while the nonoperating seg-
ment summarizes all ancillary activities. In 2020, Polaris reported operating
income of $592 million and nonoperating expenses of $71 million, consisting
largely of interest expense.
Measuring Earnings
This is not the place for a detailed discussion of accounting. But because
earnings, or lack of same, are a critical indicator of financial health, several
technical details of earnings measurement deserve mention.
Accrual Accounting
The measurement of accounting earnings involves two steps: (1) identifying
revenues for the period and (2) matching the corresponding costs to revenues.
Looking at the first step, it is important to recognize that revenue is not the
same as cash received. According to the accrual principle (a cruel princi-
ple?) of accounting, revenue is recognized as soon as “the effort required to
generate the sale is substantially complete and there is a reasonable certainty
that payment will be received.” The accountant sees the timing of the actual
cash receipts as a mere technicality. For credit sales, the accrual principle
means that revenue is recognized at the time of sale, not when the customer
pays. This can result in a significant time lag between the generation of rev-
enue and the receipt of cash. Looking at Polaris, we see that revenue in 2020
was $7,108 million, but accounts receivable increased by $67 million. We
conclude that cash received from sales during 2020 was only $7,041 million
($7,108 – $67 million). The other $67 million still awaits collection.
Depreciation
Fixed assets and their associated depreciation present the accountant with a
particularly challenging problem in matching. Suppose that in 2022, a com-
pany constructs, for $50 million, a new facility that has an expected produc-
tive life of 10 years. If the accountant assigns the entire cost of the facility
to expenses in 2022, some weird results follow. Income in 2022 will appear
depressed due to the $50 million expense, while income in the following nine
years will look that much better as the new facility contributes to revenue but
not to expenses. Thus, charging the full cost of a long-term asset to one year
clearly distorts reported income.
The preferred approach is to spread the cost of the facility over its expected
useful life in the form of depreciation. Because the only cash outlay associ-
ated with the facility occurs in 2022, the annual depreciation listed as a cost on
the company’s income statement is not a cash outflow. It is a noncash charge
used to match the 2022 expenditure with resulting revenue. Said differently,
depreciation is the allocation of past expenditures to future time periods to
match revenues and expenses. A glance at Polaris’s income statement reveals
that, in 2020, the company included a $261 million noncash charge for depre-
ciation and amortization among their operating expenses. Further along in the
text, we will see that during the same year, the company spent $214 million
acquiring new property, plant, and equipment.
To determine the amount of depreciation to take on a particular asset,
three estimates are required: the asset’s useful life, its salvage value, and the
method of allocation to be employed. These estimates should be based on
economic and engineering information, experience, and any other objective
data about the asset’s likely performance. Broadly speaking, there are two
methods of allocating an asset’s cost over its useful life. Under the straight-
line method, the accountant depreciates the asset by a uniform amount each
year. If an asset costs $50 million, has an expected useful life of 10 years, and
has an estimated salvage value of $10 million, straight-line depreciation will
be $4 million per year ([$50 million – $10 million]/10).
The second method of cost allocation is really a family of methods known
as accelerated depreciation. Each technique charges more depreciation in the
early years of the asset’s life and correspondingly less in later years. Accel-
erated depreciation does not enable a company to take more depreciation in
total; rather, it alters the timing of the recognition. While the specifics of the
various accelerated techniques need not detain us here, you should recog-
nize that the life expectancy, the salvage value, and the allocation method
a company uses can fundamentally affect reported earnings. In general, if
a company is conservative and depreciates its assets rapidly, it will tend to
understate current earnings, and vice versa.
Taxes
A second noteworthy feature of depreciation accounting involves taxes. Most
U.S. companies, except very small ones, keep at least two sets of financial
records: one for managing the company and reporting to shareholders, and
another for determining the firm’s tax bill. The objective of the first set is,
or should be, to accurately portray the company’s financial performance. The
objective of the second set is much simpler: to minimize taxes. Forget objec-
tivity and minimize taxes. These differing objectives mean the accounting
principles used to construct the two sets of books differ substantially. Deprecia-
tion accounting is a case in point. Regardless of the method used to report to
shareholders, company tax books will minimize current taxes by employing the
most rapid method of depreciation over the shortest useful life the tax authori-
ties allow. In the United States, tax depreciation is governed by a set of rules
called the Modified Accelerated Cost Recovery System (MACRS). We will
not delve into the scintillating details of MACRS here, but interested readers
can refer to IRS Publication 946, a 113-page guide to all things MACRS.
This dual reporting means that actual cash payments to tax authorities usu-
ally differ from the provision for income taxes appearing on a company’s
income statement, sometimes trailing the provision and other times exceeding
it. When this happens, the company will report the difference somewhere on
its balance sheet. If the company pays less than it owes, it will have a liability
with a name like “taxes payable,” representing the money it must pay tax
authorities in future years. In the meantime, this money can be used to finance
the business. Tax deferral techniques create the equivalent of interest-free
loans from the government. In Japan and other countries that do not allow the
use of separate accounting techniques for tax and reporting purposes, these
complications never arise. Polaris had over $30 million in taxes payable in
2020; in Table 1.2, this amount is included as part of the “other” current and
long-term liabilities listed on their balance sheet.
Research and Marketing

Now that you understand how accountants use depreciation to spread the cost
of long-lived assets over their useful lives to better match revenues and costs,
you may think you also understand how they treat research and marketing
expenses. Because research and development (R&D) and marketing outlays
promise benefits over a number of future periods, it is only logical that an
accountant would show these expenditures as assets when they are incurred
and then spread the costs over the assets’ expected useful lives in the form of a
noncash charge such as depreciation. This may be impeccable logic, but it isn’t
what accountants do, at least not in the United States. Because the magnitude
and duration of the prospective payoffs from R&D and marketing expendi-
tures are difficult to estimate, accountants typically duck the problem by forc-
ing companies to record the entire expenditure as an operating cost in the year
incurred. Thus, although Polaris’s R&D outlays of $296 million in 2020 may
have produced technical breakthroughs that will benefit the firm for decades to
come, all of the costs must be shown on Polaris’s income statement in 2020.
The requirement that companies expense all research and marketing expendi-
tures when incurred commonly understates the profitability of high-tech and
high-marketing companies and complicates comparison of American compa-
nies with those in other nations that treat such expenditures more liberally.
Defining Earnings
Creditors and investors look to company earnings for help in answering two fundamen-
tal questions: How did the company do last period, and how might it do in the future?
To answer the first question, it is important to use a broad-based measure of income that
includes everything affecting the company’s performance over the accounting period. How-
ever, to answer the second question, we want a narrower income measure that abstracts
from all unusual, nonrecurring events to focus strictly on the company’s steady state, or
ongoing, performance.
The accounting profession and the Securities and Exchange Commission obligingly pro-
vide two such official measures, known as net income and operating income, and require
companies to report them on their financial statements.
Net income, or net profit, is the proverbial “bottom line,” defined as total revenue less
total expenses.
Operating income is profit realized from day-to-day operations excluding taxes, interest
income and expense, and what are known as extraordinary items. An extraordinary item is
one that is both unusual in nature and infrequent in occurrence.
Managers and investment professionals often consider several other, unofficial mea-
sures of earnings. Here are two of the more popular ones:
EBIT (pronounced E-bit) is earnings before interest and taxes, a useful and widely used
measure of a business’s income before it is divided among creditors, owners, and the tax-
man. EBIT is sometimes used interchangeably with operating income.
EBITDA (pronounced E-bit-da) is earnings before interest, taxes, depreciation, and amor-
tization. EBITDA has its uses in some industries, such as broadcasting, where depreciation
charges may routinely overstate true economic depreciation. However, as Warren Buffett
notes, treating EBITDA as equivalent to earnings is tantamount to saying that a business is
the commercial equivalent of the pyramids—forever state-of-the-art, never needing to be
replaced, improved, or refurbished. In Buffett’s view, EBITDA is a number favored by invest-
ment bankers when they cannot justify a deal based on EBIT.
Sources and Uses Statements

Two very basic but valuable things to know about a company are where it
gets its cash and how it spends the cash. At first blush, it might appear that
the income statement will answer these questions because it records flows of
resources over time. But further reflection will convince you that the income
statement is deficient in two respects: It includes accruals that are not cash
flows, and it lists only cash flows associated with the sale of goods or services
during the accounting period. A host of other cash receipts and disbursements
do not appear on the income statement. Thus, Polaris increased its investment
in accounts receivable by $67 million in 2020 (Table 1.2) with little or no
trace of this buildup on its income statement. Polaris also decreased long-
term debt by $218 million with little effect on its income statement.
To gain a more accurate picture of where a company got its money and
how it spent it, we need to look more closely at the balance sheet or, more
precisely, two balance sheets. Use the following two-step procedure. First,
place two balance sheets for different dates side by side, and note all of the
changes in accounts that occurred over the period. The changes for Polaris
in 2020 appear in the rightmost column of Table 1.2. Second, segregate the
changes into those that generated cash and those that consumed cash. The
result is a sources and uses statement.
Here are the guidelines for distinguishing between a source and a use
of cash:
∙ A company generates cash in two ways: by reducing an asset or by increas-
ing a liability. The sale of used equipment, the liquidation of inventories,
and the reduction of accounts receivable are all reductions in asset accounts
and are all sources of cash to the company. On the liabilities side of the bal-
ance sheet, an increase in a bank loan and the sale of common stock are
increases in liabilities, which again generate cash.
∙ A company also uses cash in two ways: to increase an asset account or to
reduce a liability account. Adding to inventories or accounts receivable
and building a new plant all increase assets and all use cash. Conversely,
the repayment of a bank loan, the reduction of accounts payable, and an
operating loss all reduce liabilities and all use cash.
Because it is difficult to spend money you don’t have, total uses of cash
over an accounting period must equal total sources.
Table 1.4 presents a 2020 sources and uses statement for Polaris. The
largest source for Polaris is an increase in accounts payable of $332 mil-
lion, meaning that Polaris has preserved cash by not paying its suppliers
TABLE 1.4 Polaris Inc. Sources and Uses Statement, 2020 ($ millions)
Source: Polaris annual reports and Compustat
Sources
Reduction in other current assets 20
Reduction in goodwill and intangible assets 27
Increase in accounts payable 332
Increase in accrued liabilities 38
Increase in other current liabilities 16
Increase in other long-term liabilities 23
Increase in total shareholders’ equity 326
Total sources $782
Uses
Increase in cash and cash equivalents 387
Increase in accounts receivable 67
Increase in inventories 57
Increase in net property, plant, and equipment 4
Increase in other assets 24
Decrease in debt due in one year 25
Decrease in long-term debt 218
Total uses $782
immediately. The second largest source is an increase in shareholders’ equity

of $326 million, the bulk of which comes from profits earned by Polaris dur-
ing the year. What has Polaris done with this cash? The two biggest uses are
$218 million that has gone to pay down long-term debt, and $387 million that
has been stashed in Polaris’s cash account.
The Two-Finger Approach

I personally do not spend a lot of time constructing sources and uses state-
ments. It might be instructive to go through the exercise once or twice just
to convince yourself that sources really do equal uses. But once beyond this
point, I recommend using a “two-finger approach.” Put the two balance sheets
side by side, and quickly run any two fingers down the columns in search of
big changes. In the case of Polaris, this should enable you to quickly observe
that Polaris used increases in equity and accounts payable primarily to pay
down debt and build up its cash account. In 30 seconds or less, you have
the essence of a sources and uses analysis and are free to move on to more
stimulating activities. The other changes are largely window dressing of more
interest to accountants than to managers.
How Can an Increase in Cash Be a Use of Cash?

One potential source of confusion in Table 1.4 is that the increase in cash and cash equiva-
lents in 2020 appears as a use of cash. How can an increase in cash be a use of cash?
Simple. It is the same as when you deposit money into your checking account. You increase
your bank balance but have less cash on hand to spend. Conversely, a withdrawal from
your bank account decreases your balance but increases spendable cash in your pocket.
The Cash Flow Statement

Identifying a company’s principal sources and uses of cash is a useful skill
in its own right. It is also an excellent starting point for considering the cash
flow statement, the third major component of financial statements along with
the income statement and the balance sheet.
In essence, a cash flow statement just expands and rearranges the sources
and uses statement, placing each source or use into one of three broad catego-
ries. The categories and their values for Polaris in 2020 are as follows:
Source (or Use) of

Category Cash ($ millions)
1. Cash flows from operating activities $945
2. Cash flows from investing activities ($151)
3. Cash flows from financing activities ($407)
Double-entry bookkeeping guarantees that the sum of the cash flows in these
three categories equals the change in cash balances over the accounting period.
Table 1.5 presents a complete cash flow statement for Polaris in 2020.
The first category, “cash flows from operating activities,” can be thought of
as a rearrangement of Polaris’s financial statements to eliminate the effects
of accrual accounting on net income. First, we add all noncash charges, such
as depreciation and amortization, back to net income, recognizing that these
charges did not entail any cash outflow. Then, we add the changes in current
assets and liabilities to net income, acknowledging, for instance, that some
sales did not increase cash because customers had not yet paid, while some
expenses did not reduce cash because the company had not yet paid. Changes
in other current assets and liabilities, such as inventories, appear here because
the accountant, following the matching principle, ignored these cash flows
when calculating net income.
If cash flow statements were just a reshuffling of sources and uses state-
ments, as many textbook examples suggest, they would be redundant, for
a reader could make his own in a matter of minutes. A chief attraction of
TABLE 1.5 Polaris Inc. Cash Flow Statement, 2020 ($ millions)*

Source: Polaris annual report and Compustat
Cash Flows from Operating Activities

Net income $ 414
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 261
Noncash compensation 65
Other (100)
Changes in assets and liabilities:
Accounts receivable (56)
Inventories (45)
Accounts payable 327
Other 80
Net cash provided by (used in) operating activities 945
Cash Flows from Investing Activities

Capital expenditures (214)
Other investing activities 63
Net cash provided by (used in) investing activities (151)
Cash Flows from Financing Activities

Net borrowing (repayment) of long-term debt (246)
Net issuance (repurchase) of common stock (17)
Dividends paid (153)
Other 9
Net cash provided by (used in) financing activities (407)
Net increase (decrease) in cash 387

Cash at beginning of year 157
Cash at end of year $544
cash flow statements is that companies reorganize their cash flows into new
and sometimes revealing categories. To illustrate, Polaris’s cash flow state-
ment in Table 1.5 reveals that during 2020 it paid dividends of $153 million,
repurchased $17 million of its common stock (net of new stock issued), and
invested $214 million in new capital expenditures. This is the only place in its
financial statements where these basic activities are even mentioned.
A second attraction of a cash flow statement is that it casts a welcome light
on firm solvency by highlighting the extent to which operations are generating
or consuming cash. Polaris’s cash flow statement in 2020 indicates that cash
flow from operating activities more than doubled Polaris’s net income for the
year. One reason for the difference is that the income statement includes a
$261 million noncash charge for depreciation. An even larger amount comes
from the increase of over $300 million in accounts payable.
Why Are the Numbers Different?

Polaris’s sources and uses statement in Table 1.4 tells us that accounts receivable rose
$67 million in 2020 (a use of cash), yet its cash flow statement in Table 1.5 says that
accounts receivable increased $56 million over the same period. Nor is this an isolated
example. Many of the apparently identical quantities differ from one statement to the other.
Why the difference?
Here are two possible answers. Companies often divide changes in current assets and
liabilities into two parts: those attributable to existing activities, and those due to newly
acquired businesses, with the first appearing in cash flows from operating activities and
the second in cash flows from investing activities. By pushing uses of cash into invest-
ing activities as much as possible, a company enhances its recorded cash generated by
operating activities—an appealing outcome. The second answer involves exchange rates.
Companies like Polaris have assets and liabilities of various types scattered all over the
world. To construct a consolidated balance sheet, accountants translate a company’s
foreign-denominated accounts into U.S. dollars at the then prevailing exchange rates. As a
result, the balance sheet changes we observe on consolidated statements are due at least
in part to changing currency values. However, because the currency-induced changes are
not cash flows until the assets or liabilities are brought home, accountants omit them from
the numbers appearing on its cash flow statement.
Are these answers complicated? Yes. Do the manipulations described add to our under-
standing of Polaris’s performance? I doubt it.
Another noteworthy entry on Polaris’s cash flow statement is “noncash

compensation,” which contributed $65 million to cash flow from opera-
tions in 2020. After a long and bitter battle among businesses, Congress, and
accounting regulators, employee stock options are now, correctly, classified
as an expense in the U.S. However, they are not a cash flow, because no cash
exchanges hands when a company grants stock options to an employee. So
they too must be added back to net income when calculating cash flow from
operations. If you are wondering how stock options can be an expense if the
company doesn’t pay any cash to anyone, the answer is that they are a cost
to shareholders, who see their ownership percentage diluted as employees
acquire shares without paying full value for them.
Some analysts maintain that net cash provided by operating activities,
appearing on the cash flow statement, is a more reliable indicator of firm
performance than net income. They argue that because net income depends
on myriad estimates, allocations, and approximations, devious managers can
easily manipulate it. Numbers appearing on a company’s cash flow statement,
on the other hand, record the actual movement of cash, and are thus seen to be
more objective measures of performance.
There is certainly some merit to this view, but it also has two problems.
First, low or even negative net cash provided by operating activities does not
necessarily indicate poor performance. Rapidly growing businesses in par-
ticular must customarily invest in current assets, such as accounts receivable
What Is Cash Flow?

So many conflicting definitions of cash flow exist today that the term has almost lost its
meaning. At one level, cash flow is very simple. It is the movement of money into or out of
a cash account over a period of time. The problem arises when we try to be more specific.
Here are four common definitions of cash flow you are likely to encounter.
Net cash flow = Net income + Noncash items
Often known in investment circles as cash earnings, net cash flow is intended to measure
the cash a business generates, as distinct from the earnings—a laudable objective. Apply-
ing the preceding formula to Polaris’s 2020 figures (Table 1.5), its net cash flow was $640
million, equal to net income plus depreciation, noncash compensation, and other noncash
adjustments.
A problem with net cash flow as a measure of cash generation is that it implicitly
assumes a business’s current assets and liabilities are either unrelated to operations or do
not change over time. In Polaris’s case, the cash flow statement reveals that changes in a
number of current assets and liabilities produced $306 million in cash. A more inclusive
measure of cash generation is therefore cash flow from operating activities as it appears on
the cash flow statement.
Cash flow from operating activities = Net cash flow
  

± Changes in current assets and liabilities
A third, even more inclusive measure of cash flow, popular among finance specialists is
Total cash available for distribution to owners and creditors
Free cash flow =      
after funding all worthwhile investment activities
Free cash flow extends cash flow from operating activities by recognizing that some of the
cash a business generates must be plowed back into the business, in the form of capital
expenditures, to support growth. Abstracting from a few technical details, free cash flow is
essentially cash flow from operating activities less capital expenditures. As we will see in
Chapter 9, free cash flow is a fundamental determinant of the value of a business. Indeed,
one can argue that the principal means by which a company creates value for its owners is
to increase free cash flow.
Yet another widely used cash flow measure is
A sum of money today having the same value
Discounted cash flow =     
as a future stream of cash receipts and disbursements
Discounted cash flow refers to a family of techniques for analyzing investment opportuni-
ties that take into account the time value of money. A standard approach to valuing invest-
ments and businesses uses discounted cash flow techniques to calculate the present value
of projected free cash flows. This is the focus of the last three chapters of this book.
My advice when tossing cash flow terms about is to either use the phrase broadly to
refer to a general movement of cash or to define your terms carefully.
and inventories, to support increasing sales. And although such investments

reduce net cash provided by operating activities, they do not in any way sug-
gest poor performance. Second, cash flow statements turn out to be less objec-
tive, and thus less immune to manipulation than might be supposed. Here’s a
simple example. Suppose two companies are identical except that one sells its
product on a simple open account, while the other loans its customers money
enabling them to pay cash for the product. In both cases, the customer has the
product and owes the seller money. But the increase in accounts receivable
recorded by the first company on each sale will lower its cash flows from
operating activities relative to the second, which can report the customer loan
as part of investing activities. Because the criteria for apportioning cash flows
among operating, investing, and financing activities are ambiguous, subjec-
tive judgment must be used in the preparation of cash flow statements.
Much of the information contained in a cash flow statement can be gleaned
from careful study of a company’s income statement and balance sheet. None-
theless, the statement has three principal virtues. First, accounting neophytes
and those who do not trust accrual accounting have at least some hope of
understanding it. Second, the statement provides more accurate information
about certain activities, such as share repurchases and employee stock options
than one can infer from income statements and balance sheets alone. Third, it
casts a welcome light on cash generation and solvency.
Financial Statements and the Value Problem

To this point, we have reviewed the basics of financial statements and grap-
pled with the distinction between earnings and cash flow. This is a valuable
start, but if we are to use financial statements to make informed business deci-
sions, we must go further. We must understand the extent to which accounting
numbers reflect economic reality. When the accountant tells us that Polaris’s
total assets were worth $4,922 million on December 31, 2020, is this literally
true, or is the number just an artificial accounting construct? To gain perspec-
tive on this issue, and in anticipation of later discussions, I want to conclude
by examining a recurring problem in the use of accounting information for
financial decision making.
Market Value vs. Book Value

Part of what I will call the value problem involves the distinction between the
market value and the book value of shareholders’ equity. Polaris’s 2020 bal-
ance sheet states that the value of shareholders’ equity is $1,434 million. This
is known as the book value of Polaris’s equity. However, Polaris is not worth
$1,434 million to its shareholders or to anyone else, for that matter. There
are two reasons. One is that financial statements are largely transactions-
based. If a company purchased an asset for $1 million in 1980, this transac-
tion provides an objective measure of the asset’s value, which the accountant
uses to value the asset on the company’s balance sheet. Unfortunately, it is
a 1980 value that may or may not have much relevance today. To further
confound things, the accountant attempts to reflect the gradual deterioration

of an asset over time by periodically subtracting depreciation from its bal-
ance sheet value. This practice makes sense as far as it goes, but depreciation
is the only change in value an American accountant customarily recognizes.
The $1 million asset purchased in 1980 may be technologically obsolete and
therefore virtually worthless today; or, due to inflation, it may be worth much
more than its original purchase price. This is especially true of land, which
can be worth several times its original cost.
It is tempting to argue that accountants should forget the original costs of
long-term assets and provide more meaningful current values. The problem is
that objectively determinable current values of many assets do not exist, and
it is probably not wise to rely on incumbent managers to make the necessary
adjustments. Faced with a choice between relevant but subjective current val-
ues and irrelevant but objective historical costs, accountants opt for irrelevant
historical costs. Accountants prefer to be precisely wrong than approximately
right. This means it is the user’s responsibility to make any adjustments to
historical-cost asset values she deems appropriate.
Prodded by regulators and investors, the Financial Accounting Standards
Board, accounting’s principal rule-making organization, increasingly stresses
what is known as fair value accounting, according to which certain assets and
liabilities must appear on company financial statements at their market values
instead of their historical costs. Such “marking to market” applies to selected
assets and liabilities that trade actively on financial markets, including many
common stocks and bonds. Proponents of fair value accounting acknowl-
edge it will never be possible to eliminate historical-cost accounting entirely,
but maintain that market values should be used whenever possible. Skeptics
respond that mixing historical costs and market values in the same financial
statement only heightens confusion, and that periodically revaluing company
accounts to reflect changing market values introduces unwanted subjectiv-
ity, distorts reported earnings, and greatly increases earnings volatility. They
point out that under fair value accounting, changes in owners’ equity no lon-
ger mirror the results of company operations but also include potentially large
and volatile gains and losses from changes in the market values of certain
assets and liabilities. The gradual movement toward fair value accounting
was initially greeted with howls of protest, especially from financial insti-
tutions concerned that the move would increase apparent earnings volatility
and, more menacingly, might reveal that some enterprises are worth less than
historical-cost financial statements suggest. To these firms, the appearance of
benign stability is apparently more appealing than the hint of an ugly reality.
To understand the second, more fundamental reason Polaris is not worth
$1,434 million, recall that equity investors buy shares for the future income
they hope to receive, not for the value of the firm’s assets. Indeed, if all
goes according to plan, most of the firm’s existing assets will be consumed
in generating future income. The problem with the accountant’s measure of
shareholders’ equity is that it bears little relation to future income. There are
Adjusted Earnings
For a variety of sometimes legitimate reasons, corporate executives and business analysts
often argue that official earnings measures are inadequate, encouraging a whole cottage
industry devoted to creating new and improved earnings measures, collectively known as
“adjusted earnings.” Companies began reporting adjusted earnings regularly in the early
1990s and the practice was controversial from the start. Because they were not con-
strained to follow accounting guidelines, managers often used adjusted earnings as a way
to accentuate the positive or to meet earnings targets by sweeping various expenses under
the carpet. Initially, companies did not have to disclose how they calculated adjusted earn-
ings, and adjusted earnings came to be known as “earnings before the bad stuff.” However,
a provision of the Sarbanes–Oxley Act of 2002 required that companies explain the dif-
ferences between reported adjusted earnings and official net income, and the SEC issued
further reporting guidelines in 2016. Managers are still free to be creative in their definition
of adjusted earnings, but they at least have to show investors what they are doing.
In recent years, over two-thirds of companies in the S&P 500 have reported adjusted
earnings. Common adjustments eliminate one-time items such as restructuring charges,
litigation expenses, and acquisitions. Some companies also remove recurring items, such
as investment gains or losses and stock compensation. The adjustments usually make
companies’ earnings look better, not worse. For S&P 500 companies between 2010 to
2015, adjusted earnings were higher than official earnings 78 percent of the time and
were 23 percent higher than official earnings, on average. Sometimes the differences are
enormous—for 2020, Disney reported an official loss of $2.8 billion, but also reported an
adjusted profit of $3.6 billion.
Why are executives so fond of reporting adjusted earnings? One reason might be to pro-
vide investors with cleaner information that is more indicative of future performance. Research
in the early 2000s indicated that adjusted earnings were in fact more informative than official
earnings, but more recent research suggests that this is no longer the case. Another less-
altruistic reason might be that adjusted earnings measures allow executives to receive higher
pay. Recent research shows that executives whose bonuses are based on adjusted earn-
ings receive higher bonus compensation, after controlling for other factors. CEOs of compa-
nies that make especially large positive adjustments to arrive at adjusted earnings receive
bonuses about $2 million higher than would be expected based on other factors.a
This is a good opportunity to disclose that I also have dabbled in the adjusted earnings
business while presenting Polaris’s financial statements for 2020. In my judgment, Polar-
is’s official net income for 2020 of just $125 million (not shown above) is distorted by an
unusual, one-time noncash charge of $379 million called a goodwill impairment (more on
this later). To enhance the accuracy of net income as an indicator of future performance, I
adjusted Polaris’s financial statements to be as if this write-off had not occurred, arriving at
adjusted net income of $414 million, as reported in Table 1.3. Accountants may frown, but
this adjustment will make our discussion of Polaris more realistic and productive.
a
For more details, see Nicholas Guest, S. P. Kothari, and Robert Pozen, “High Non-GAAP Earnings
Predict Abnormally High CEO Pay,” January 2019; and Asher Curtis, Valerie Li, and Paige Patrick, “The
Use of Adjusted Earnings in Performance Evaluation,” Review of Accounting Studies, 2021.
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Gold, he did the story, Which Is Absurd, and saw occasionally
Edward VII., then Prince of Wales, who was enjoying a vacation as
plain Mr. Smith. After he had lost money he could ill spare one night,
a dazzling person with large violet eyes told him to follow her, and he
did with a five-franc piece, winning back all he had lost and 100
francs besides. She was Lily Langtry. Back in London and waiting for
the publication of his story, he seized on a novel of Robert Barr’s and
made it into a four-act play. Compton Mackenzie’s father, the actor,
Edward Compton, played it in the English provinces for a year (after
drastic alterations) and it made enough money to enable Hamilton to
take rooms in London. Whereupon, for a while, everything he wrote
came back with a rejection slip.
Which Is Absurd, whatever its demerits, had the quality of
provocation. An evening paper, reviewing it, asked: “Who is Cosmo
Hamilton?” and answered: “Either a very bitter old man who is
bankrupt of every hope, or an unkissed girl in a boarding school who
ought to be spanked with a brush.” Now with the fewest exceptions,
book reviews do not sell books; but this is the type of review that
infallibly sells a book. And shortly Mr. Hamilton found himself writing
for the Pall Mall Gazette, along with Mrs. Humphry Ward, Alice
Meynell, and others well-known and doing a syndicated London
letter which required his presence in the high places.
His play, “The Wisdom of Folly,” lived two weeks, and after a spell
as editor of a short-lived weekly paper he became one of a brilliant
company of contributors to the World. William Archer as dramatic
critic, Richard Dehan as fictionist, Robert Hichens as dialogist,
Gilbert Frankau, Philip Gibbs and Max Beerbohm were some of the
staff. Before Cosmo Hamilton was thirty he was to become editor of
this paper. But meanwhile a variety of fates awaited him. He
dramatized Kipling’s The Story of the Gadsbys in a fashion
satisfactory to the author; had a close shave from dishonor as one of
the directors of a speculative mineral exploration enterprise which
had trapped various well-known names to aid it; and faced
bankruptcy. This last adventure resulted from the failure of his first
wife, the actress, Beryl Faber, in a theatrical season; and after Mr.
Hamilton had taken on the debts he retired to the country to cope
with them by writing.
What then occurred was dramatic enough, as life has a fashion of
being. A telegram came from a man Hamilton didn’t know. It read:
“Kindly see me tomorrow twelve o’clock Savoy Hotel Charles
Frohman.” Mr. Hamilton kept the appointment, which marked the
beginning of a long association with the famous American theatrical
manager. In five consecutive years there was no time when one or
more of his plays was not running in London. Probably the best-
remembered is “The Belle of Mayfair,” in which Edna May was
succeeded by Billie Burke, and which ran for three years.
iii
At a time when he most urgently needed money, Mr. Hamilton had
had a series of conversations with an actor manager known on both
sides of the Atlantic. This man needed a new play and Hamilton had
the necessary idea, but there was a difficulty. “If I were prepared to
give him all the best scenes, all the best lines and build the play not
round the boy and girl but all about himself, make him suffer as the
boy was to suffer, love as the girl was to love, and, as he was to be a
clergyman, undergo a momentary shattering of faith which would
give him a first-class opportunity to show how supremely he could
touch the tragic note, a check on account of royalties would be paid
at once and a contract signed.” Mr. Hamilton refused, thereby
sacrificing all future chances in this quarter, but “when that play was
offered to the public in 1911 word for word as I had described it to
the man who subsequently forgot my face, it was called ‘The
Blindness of Virtue.’ Can’t you imagine how I love to say that it has
been running ever since?”[63]
It was first written as a novel, however, under that title. The novel
was well-received and when Mr. Hamilton’s younger brother, Arthur
Hamilton Gibbs, came down from Oxford for some golf he suggested
that a play be done from the novel. Cosmo’s reply can be imagined,
but the old idea took instant hold, and the manuscript of the play was
ready precisely when an actor who had taken the lease of the
Adelphi Theatre, meeting Hamilton on the street, asked: “Why don’t
you make a play of The Blindness of Virtue?” C. H.’s reply was to
hand him the typed play.
This novel and play mark a decisive point in the author’s career. It
appeared in 1911 and the following year Mr. Hamilton made his first
visit to America. On his return he was inevitably asked: “Are you
going to use your novels for the ventilation of vital questions or are
you going to revert to the entertaining novel of society life?” He
answered: “I believe that I have now lived long enough, suffered
enough, observed enough and studied enough to try and rise a little
above the level of a merely entertaining writer,—one content to give
his readers satirical pictures of men and women of the world, their
surroundings, their little quarrels and their little love affairs. I believe
that I have it in me to put into my work something that is of value
apart from any pretensions to literary merit that it may have; that will
cause the people who read it to ask themselves whether the world
and the social system is as perfect as they imagined it to be, if they
ever thought about these things. I don’t think I can better describe
my intentions than by saying that I am going to write human stories
for human beings and no longer light sketches of people who are
afraid to think and do not desire to remember their great and grave
responsibilities.”
Book, play and motion picture must have made everyone familiar
with The Blindness of Virtue as a sermon on sex education
powerfully implied by the engrossing story of an innocence that was
merely ignorance. A glance at Mr. Hamilton’s succeeding novels will
show how consistently he has stuck to his determination not to write
mere light fiction.
The Door That Has No Key (1913) is a story of married life. A man
has given a woman his name but has never found the key to her
mind. The Miracle of Love (1915) is the story of an English duke with
a conscience and a sense of duty. He faces the necessity of
marrying for money in order to restore family fortunes, although he is
already in love with a girl whom it is quite impossible for him to
marry, even though he sacrifice, for her sake, title and estates. The
Sins of the Children (1916) is more strictly in succession to The
Blindness of Virtue. This is a novel of American family life illustrating
the danger to young people coming from ignorance of sex truths,
and showing that the children’s sins are principally due to the failure
of parents to tell them what they should know.
Scandal (1917) is an exceptionally good illustration of Cosmo
Hamilton’s ability to write a dramatically interesting story, freighted
with moral and ethical teachings, but fictionally buoyant, and with the
story uppermost all the time. Beatrix Vanderdyke is the beautiful
daughter of wealthy parents. She is also the typical American spoiled
child. A flirtation in which she throws conventions aside gives the
occasion for scandalous talk; and to enable her to cope with the
situation she asks Pelham Franklin, an acquaintance, not to show
her up when she announces that he and she have been secretly
married. Franklin has his own idea as to the lesson she needs; he at
once acknowledges her as his wife and proceeds to treat her as if
she were. It is the way, with such a girl, to a happy ending.
Who Cares (1919) is the story of a boy and girl, high-spirited,
healthy, normal and imaginative, flung suddenly upon their own
resources, buying their own experiences, and coming finally out of a
serious adventure hurt and with a price to pay, but not damaged
because of the inherent sense of cleanness that belongs to both. His
Friend and His Wife (1920) describes the tragic repercussions in
tranquil homes of one moral misstep. The Blue Room (1920) is the
story of a young man whose reformation took place too late to avoid
giving a shock of keen mental anguish to his prospective bride on
the eve of their marriage. These two people achieve happiness not
without scars, and the novel is a sharp stroke at the double standard
of morality or sex ethics.
The Rustle of Silk (1922) is a presentation of political and social
life in after-war London. Lola Breezy, a reincarnation in a shabby,
lower middle class environment of the famous and alluring Madame
de Breze of eighteenth century France, lifts herself out of her
surroundings by sheer force of personality and becomes the friend
and confidante of England’s Home Secretary, the “coming”
statesman.
Another Scandal (1923) is an extension of Scandal and deals with
Beatrix Vanderdyke and Pelham Franklin after their marriage. Mr.
Hamilton, describing the genesis of the novel, explains: “Here was
this astounding creature, Beatrix, not only married but about to have
a baby. Sentimental cynic that I am, I hoped that she had settled
down. At the same time, I dreaded a tangent. I hadn’t long to wait.
Hardly had Franklin II. time enough to open his eyes when Beatrix
suffered the inevitable reaction, finding that the ‘girl stuff,’ as she had
an irritating way of calling that pathetic-tragic-romantic thing in her,
had not worked itself out.” There is some extremely sound
philosophy on the whole subject of marriage in this novel.
iv
Scandal, like The Blindness of Virtue, made an effective play; the
number who will recall Francine Larrimore in the rôle of Beatrix
Vanderdyke is large. Rather better, except for those who have the
empty prejudice against reading plays, than any of Mr. Hamilton’s
novels is his Four Plays (1924), containing “The New Poor,”
“Scandal,” “The Silver Fox,” and “The Mother Woman.” It is amusing
to read the note in connection with “The Mother Woman”:
“Misproduced in New York under the title of ‘Danger’ in 1922.” Mr.
Hamilton, in a long experience with the theater, has suffered much
and most of it with sportsmanship and cheerfulness; he is entitled to
this calm and rather deadly comment.
“The New Poor” is social satire, a comedy in which actors
impersonate the servants; but the other three plays are in line with
Mr. Hamilton’s recent novels. “The Silver Fox” is a comedy of
marriage and divorce; but unquestionably the most powerful play of
the collection is “The Mother Woman.” Dealing with the question of
children in a marriage which is a social contract rather than a
sacrament, at least, from the wife’s viewpoint, its strength lies in the
hardness and the consistency with which the wife is characterized. In
its thesis the play bears wholly in one direction—not a weakness in
the theatre, of course; but Mr. Hamilton has the wisdom to give Violet
Scorrier good speeches and to let her walk off the stage, at the end
of the last act, unchanged, unchanging, and satisfied with her
unshared ego.
The history of these plays and various others, together with much
of the history of his novels will be found in Mr. Hamilton’s extremely
readable Unwritten History. This, if it must be classed, can only be
put into the list of informal and anecdotal autobiographies. It has all
the good humor, the respect for human interest and the relative
disregard for the claims of mere importance which should pervade a
book of its sort. In other words, it has the exhilaration of talk devoted
to one’s liveliest recollections, with no special regard for chronology
and with only the spur of mood. And the mood? It is throughout
humorous, even self-humorous, democratic and impartial. Mr.
Hamilton does not go out of his way to express his opinions, but
neither does he dodge a natural comment when the occasion
comes. You gather, for example, his very definite and not favorable
view of David Lloyd George. The book is exceptional for its range of
portraits. In anything from a sentence or two to several pages there
is something about Kipling, Barrie, Conrad, Sinclair Lewis,
Coningsby Dawson, Gilbert K. Chesterton, Heywood Broun and W.
J. Locke among writers; the King and Queen, Lord Roberts, Colonel
E. M. House, Mr. Asquith, Admiral Beatty, J. Pierpont Morgan, Lord
Balfour, Melville Stone and the Prince of Wales among the figures of
public life; John Drew, Owen Davis, Pinero, Augustus Thomas,
George Arliss, William Archer, Mary Pickford, Douglas Fairbanks,
Charlie Chaplin and Granville Barker among the people of the
theater. The twelve caricatures, particularly those of Bernard Shaw,
Charles Frohman, George Grossmith, Sir Martin Harvey, Mr. Lloyd
George and Lytton Strachey are the first public disclosure of Cosmo
Hamilton’s decided talent as an artist.
But perhaps the interest and engaging quality of Unwritten History
can best be shown by quoting, not an anecdote of some personage,
but some such incident as that of the first trip Mr. Hamilton made to
this side:
“Before the ship had left Southampton I was flattered by the
attention of an extremely good-looking, athletic, well-groomed
youngish man, who insisted on walking the deck with me. He took
the trouble to let me know, very shortly after we had broken the ice,
that although that trip was not his maiden one he had only made the
Western crossing once. But when, an hour before the bugle sounded
for dinner, the purser touched me on the arm as I was following him
into the smoking-room and murmured the one word ‘card-sharp,’ I
still went on utterly disbelieving this brutal summing up of a delightful
man’s profession. Those were the old bad days when America was
free, and never dreamed of interfering with the rights of foreign
vessels, and so we had a sherry and bitters together in what is now
an easy though a criminal way of encouraging an appetite. After
which, his hand closing familiarly on a box of dice, he suggested with
a naïve smile that we should kill an awkward half an hour by
throwing for five pound notes, and I saw, in a disappointed flash, the
reason of his flattery. The purser was right, as pursers have a knack
of being. And so as much to retrieve myself from his obvious
assumption that I was an ‘easy mark,’ as to be able to continue a
pleasant acquaintanceship without having again to back out of future
invitations of the same expensive sort, I made ready to dodge a
knockout blow and told him that I not only had no spare fivers to lose
but had a peculiar aversion to losing them to a card-sharp. After a
second or two of extreme surprise at my character reading and
temerity he burst out laughing, and we walked the deck together with
perfect affability during the whole of the rest of the voyage. He was
one of the most interesting men that I have ever met, a student of
Dickens and Thackeray with a strong penchant for the Brontës, and
as devoted a lover of Italy as Lucas is, with much of the same feeling
for its beauty and its treasures. At no cost at all I greatly enjoyed his
company and when, six months later, I met him by accident in
Delmonico’s, with the ruddy color that comes from sea air and
shuffleboard, I was charmed by his eager acceptance of my
invitation to dine. In the meantime he had read Duke’s Son and
although he liked my story very much and said so generously
enough, at the same time assuring me that he was not much of a
hand at modern books, he wound up by regretting that I had not met
him before I wrote about cheating at cards, because he could have
put me right on several points. He died fighting gallantly, and
probably as humorously, in the war.”
v
Readers of Unwritten History may look upon a photograph of Mr.
Hamilton’s home, an English cottage of that idyllic air which seems
to be the special property of all English cottages belonging to all
English authors. Mr. Hamilton and a young son (now somewhat
older) are on the brick steps that lead to the house, for the cottage is
on a hill. Beside the steps and in front of the house is what we call
an “old-fashioned garden”—flowers and plants in a profuse,
unordered growth, with the tall spikes of flowering hollyhocks making
the garden three-dimensional. Mr. Hamilton’s second marriage, after
the death of Beryl Faber, was with a Californian; and he now resides
here rather more than abroad, although he endeavors to spend his
summers in England and on the Continent. In the war, of course, he
was in service, first with the anti-aircraft corps (when he was finally
detailed to Sandringham, for the protection of the King and Queen
during their stay) and then as a British publicist and propagandist in
America. American audiences like him, and he reciprocates.
There is, indeed, about him personally a simplicity, directness and
fundamental unsophistication that may be perceived in his fiction but
which is missed by the casual reader and auditor and observer and
acquaintance. Accident, marked talents and a variety of surface
tastes and social interests have constantly brought him into what has
been well described as “the world where one bores oneself to death
unless one is in mischief.” But both boredom and mischief are
impossible if one continues, as C. H. has continued, to care only for
the same handful of essentials. One thinks of him, for example, as
the very antithesis of W. L. George. Less poetic than his brother,
Philip Gibbs, he has his share of the same moral earnestness (a
family trait) and gifts as great or greater as a storyteller, especially a
story of drama all compact.
BOOKS BY COSMO HAMILTON

Which Is Absurd
Adam’s Clay
Brummell
Duke’s Son (also adapted as a play in French, written with
Mme. Pierre Burton, and produced in Paris under the
title, “Bridge”)
Plain Brown—A Summer Story
The Infinite Capacity
Keepers of the House
1911 The Blindness of Virtue
1912 The Outpost of Eternity
1912 A Plea for the Younger Generation
1913 The Door That Has No Key
1915 The Miracle of Love
1916 The Sins of the Children
1917 Scandal
1919 Who Cares?
1920 His Friend and His Wife
1920 The Blue Room
1922 The Rustle of Silk
1923 Another Scandal
1924 Unwritten History (autobiographical)
1924 Four Plays: The New Poor, Scandal, The Silver Fox, and
The Mother Woman
SOURCES ON COSMO HAMILTON

Unwritten History, by Cosmo Hamilton. Autobiographical
throughout. A list of Mr. Hamilton’s plays will be found on page 351
of his Four Plays, to which the plays in the volume must be added.
The history of most of them is given in Unwritten History.
“Cosmo Hamilton, the Man.” Booklet published (1923) by Little,
Brown and Company.
“Cosmo Hamilton: His Ambitions and His Achievements.” Booklet
published (1916) by Little, Brown and Company.
Reference is made in a footnote to the text of this chapter to Philip
Gibbs’s Adventures in Journalism.
12. Lest They Forget
i
In the short preface to his Eminent Victorians, Mr. Lytton Strachey
speaks of the great biological tradition of the French, of “their
incomparable éloges, compressing into a few shining pages the
manifold existences of men.” And he speaks of biography as “the
most delicate and humane of all the branches of the art of writing.”
The tribute of a distinguished master of biographical literature was
recalled to me as I read André Maurois’s Ariel, The Life of Shelley,
so ably translated by Ella D’Arcy. Here are a comparatively few, but
gloriously shining pages. This biography has burst upon us with an
effect as surprising and luminous as Shelley himself. It is written on
gauze and its transparency shows opaline colors. The picture it gives
us is of Matthew Arnold’s “beautiful and ineffectual angel beating his
wings in a luminous void”; but I should delete the word “ineffectual.”
If Shelley was ineffectual, then the soul goes out of the world.
It needed a Frenchman, perhaps, to do the subject justice. Mr.
Strachey, as Aldous Huxley has remarked, is congenitally incapable
of penetrating the mystical mind. André Maurois was already known
to some English and American readers by the humorous and
profound novels studying an inarticulate English army officer. No one
who read The Silences of Colonel Bramble can have forgotten its
delicate portraiture. But such fiction was a pastime beside Ariel.
I could, of course, quote the praise of Arnold Bennett and other
acute judges, but it seems to me a lame thing to do. Nor is there
space to quote from Maurois’s book, and it hurts me not to be able to
transcribe some things he has written. Any attempt to convey the
quality of his book reduces me to despair; and yet I am used—
perhaps too well used—to such attempts. Maurois is gleeful, tender,
ironical; he recalls in his delicate but firm art Mr. Strachey more than
anyone else, but he is more sympathetic, and so more just, than
Strachey. This perhaps is because he has that side which Strachey,
with his Voltaire-like intellect, quite lacks. Shelley’s pathetic youth,
his three-cornered marriage, his elopement with Mary Godwin, his
few life-long friendships, his strange contacts with Byron, the brief
happiness in Italy and the ultimate, tragic release of the captive soul
to its flight in immortality—all these are told with a sense of
proportion and an effect unsurpassable. The incidental portrait of
Byron is more clear than any—yes, any!—of the ponderous
biographies that have saluted his centenary.
ii
Besides the large number of sketches and impressions of
Woodrow Wilson embedded in various recent books, there have
already been published several biographies; but The True Story of
Woodrow Wilson, by David Lawrence, seems to me distinctly the
best of these, and probably the best immediate life of Wilson we
shall have. Mr. Lawrence sat under Mr. Wilson when Wilson was
professor of jurisprudence and politics at Princeton; he was with him
at the time of nomination for Governor of New Jersey; he knew
intimately the dissension at Princeton over the Wilson policies as
President of the University; and from the time of Mr. Wilson’s
nomination for the Presidency of the United States, Mr. Lawrence
saw him continuously and at close range. For the younger man had
quickly become one of the most brilliant of the Washington
correspondents. His daily despatches then, as now, appeared in
newspapers throughout America. He was in Washington, covering
the White House, during Mr. Wilson’s terms; went with him on his
campaign tours; went with him through Europe and watched him at
Versailles; and finally was with him on the tour on which Mr. Wilson
suffered the physical collapse leading to his death. The result of this
prolonged contact is a book in which nothing relevant is omitted or
evaded. Mr. Lawrence begins with a striking chapter summarizing
the paradoxical qualities of the war President—in some respects the
most satisfactory portrait yet painted. He continues with the same
impartiality and a frankness which no one else has ventured; and not
the least valuable feature is the correspondent’s ability to throw light
on certain public acts of Wilson which have heretofore gone
unexplained.
One or two other volumes in which the political interest is
predominant deserve mention while our minds are on recent history.
Maurice Paleologue was the last French ambassador to the Russian
Court, serving about two years, from 3 July 1914 to mid-1916. The
three volumes of his An Ambassador’s Memoirs constitute the most
interesting account we have had of the imperial decline, chiefly
because M. Paleologue, with all the genius of French writing,
pictures the slow downfall with a kind of terrible fidelity. The
despairing vividness of this history is mitigated by many delightful
asides on aspects of Russian character and psychology, art and life,
written with an equal brilliance and a keen enjoyment.
Twelve Years at the German Imperial Court, by Count Robert
Zedlitz-Trützschler, is by the former controller of the household of
William II., then German Emperor. Its predominant interest is its
gradually built up character portrait of the ex-Emperor in the days of
his power. I say “gradually built up,” for the book consists simply of
private memoranda made by Zedlitz-Trützschler through the years of
his service. It seems that the unhappy Count felt keenly the inability
to say what he thought or to express his real feelings with safety to
anybody. At first, like every one else, he was fascinated by his royal
and imperial master. As he says in his preface: “There is a tendency
today to underrate the intellect of the Emperor very seriously. There
can be no dispute that his personality was a dazzling one.... He
could, whenever it seemed to him worth while, completely bewitch
not only foreign princes and diplomats, but even sober men of
business.” The spell waned because William lost interest. Zedlitz-
Trützschler’s book is the soberest and in some respects the frankest
book about William that I have seen. Its publication has put the
author in hot water with his family and all his class.
Charles Hitchcock Sherrill’s The Purple or the Red, based on
personal interviews with Mussolini of Italy, Horthy of Hungary, Primo
de Riveira of Spain and other statesmen, as well as most of the
surviving European monarchs, contains much interesting material
about after-war Europe. It is ultra-conservative in its political attitude,
but General Sherrill makes an effective case for his idea that the
Crown, in European countries, has served as a rallying point for
patriotism and by its place above factions has been a bulwark
against revolution with bloodshed.
iii
Two very exceptional autobiographies are Sir Arthur Conan
Doyle’s Memories and Adventures and Constantin Stanislavsky’s My
Life in Art. Both are ample, lavishly illustrated volumes; and far apart
as are the lives they record, I hesitate to say that either exceeds the
other in charm.
The creator of Sherlock Holmes is a big, amiable man, a person of
great simplicity of manner and almost naïve in his enjoyment of
people, places and events. His book is inevitably one of a very wide
popular appeal, the more so as Sir Arthur is entirely without conceit.
In Memories and Adventures he tells of his education at Stoneyhurst,
in Germany, and in Edinburgh, where he got his doctor’s degree. He
relates his early medical experiences and tells of his first attempts at
writing. A memorable voyage to West Africa as a ship’s surgeon, his
earlier religious ideas and beliefs and the changes they underwent,
and his marriage are all dealt with.
Then comes the story of his first real success as an author, made
with the novel, A Study in Scarlet. He had resounding subsequent
successes with Micah Clarke, The Sign of the Four, and The White
Company. The creation of Sherlock Holmes was a great milestone in
Conan Doyle’s life. This is without question the most famous
character in English fiction. Visits to America and Egypt and political
adventures are chronicled. There are reminiscences and anecdotes
of Roosevelt, George Meredith, Kitchener, Lloyd George, Balfour, Mr.
Asquith, Henry Irving, Kipling, Bernard Shaw, Barrie and many
others, living and dead, sprinkled through these extremely readable
chapters. The closing chapter is devoted to the author’s amazing
experiences in psychical research; and it must be said for him that
he writes more persuasively of his experiences and beliefs in this
affair than anyone else has ever managed to do. Altogether
Memories and Adventures will engross anyone who opens it.
Very different, with its own style and an accent of enthusiasm
throughout, is Constantin Stanislavsky’s My Life in Art. This man has
been the stage director of the Moscow Art Theater since its
establishment in 1898; and although that theater is now known
throughout the world, and is frequently hailed as the world’s foremost
playhouse, Stanislavsky’s reputation outside Russia has naturally
been confined to the circles of dramatic art. His autobiography
depended for its American publication wholly on the intrinsic interest
of what he had to tell. You may infer that that interest is
considerable. It is.
I spoke of the book’s style. It is peculiar, individual; sincere and
unskilled, awkward and yet masterful; admirable because so
evidently a part of the author. Born in 1863, the son of a wealthy
Russian merchant family and the grandson of a French actress,
Stanislavsky as a boy showed stage talents in family theatricals; and
though he later slaved over accounts in his father’s counting-house,
his nights were nights of feverish absorption in the theater. His birth
placed him in the thick of the social and intellectual life of Moscow,
for he belonged to the class which has created the arts of Russia. At
twenty-five he became director of the Society of Art and Literature, a
group of young people with serious ideas about the stage and a
great dissatisfaction with the current Russian theater. When
Stanislavsky met Nemirovich-Danchenko, the Moscow Art Theater
was founded.
The first half of My Life in Art is therefore chiefly personal, a rich
slice of Russian life with plum-like impressions and reminiscences of
Rubinstein, Tolstoy, Tommaso Salvini the elder and other great
artists of that time. The second half deals with the Moscow Art
Theater, in which Stanislavsky made for himself a reputation as one
of Russia’s greatest actors, particularly in the rôles of Othello,
Brutus, and Ivan the Terrible. This part of My Life in Art is crammed
with material of interest and value not only to those who follow the
theater but to all whose great interest is art. Chekhov, Tolstoy,
Maeterlinck and others in person are delightfully mixed with
interpretative experience in their plays and in the plays of
Shakespeare, Molière, Pushkin and other immortals. The book
closes with a description of the present work of the Moscow Art
Theater, including the Soviet régime in Russia and the visit to
America.
At last we have a biography of Clyde Fitch, achieved in that most
satisfactory of ways, by means of his letters. Mr. Montrose J. Moses
and Miss Virginia Gerson, who edited the memorial edition of Clyde
Fitch’s plays, have been engaged for some time in collecting the
Fitch letters and the result of their labor is now published in one
volume. Clyde Fitch and His Letters reflects well a personality which
people never forgot, since meeting him was, as some one said, like
meeting a figure in fiction. Fitch had a genius for friendship. His
letters were always unstudied, without pretension to literary style,
and brimful of a strongly impressionist reaction to the place or the
event. He dashed them off as the spirit prompted—on board ship, by
an open window of a Continental hotel, on the terraces of his country
house; notes of appreciation, notes of invitation, long, impulsive
descriptions of European festivities (some processional in Spain or
some picturesque account of Venetian gondoliering). They breathe,
these letters, of his warm association with the novelist, Robert
Herrick; they show a light-hearted friendship with Maude Adams and
Kate Douglas Wiggin; they show interchanges of appreciation
between Fitch and William Dean Howells. Again, the reader sees the
evidence of the personal concern and interest Fitch showed in the
actors and actresses engaged for his plays. From the incipient idea
of a plot for a play to the play’s first night, the letters enable the
reader to follow breathlessly the climb of Clyde Fitch to the position
of America’s most successful playwright. But he remained a simple,
unaffected sort of person.
One cannot say more, I suppose, than that from the day when
Richard Mansfield asked him to write “Beau Brummell” to the day of
Clyde Fitch’s death, when he had taken “The City” abroad for a final
polishing which death prevented, Clyde Fitch and His Letters is full of
the live rush of the man. A very sane and fundamentally enthusiastic
attitude was his toward American life, and those who read the book
will not miss that part of it.
iv
Of two books by women, one, Sunlight and Song, by Maria Jeritza,
is the great singer’s autobiography; while Frances Parkinson Keyes’s
Letters from a Senator’s Wife is autobiographical only incidentally.
Mme. Jeritza is not only the foremost feminine personality in grand
opera in America today, but by her concert tours she has become
known throughout the United States. Her Sunlight and Song is a
book pretty certain to interest everyone who has heard her—or
heard of her. It is written with directness, in a thoroughly popular
vein, and is utterly free from affectations or pose. An Austrian by
birth, she sang in Olmütz while in her teens, living on the hope of an
engagement in Vienna. At length she came to the capital and waited
her turn in the trying-out of voices. She was engaged for the
municipal opera and afterward for the Court Opera House. Her rôles
from operas by Richard Strauss and Puccini were rehearsed under
the personal direction of the composers; she met Caruso and
dozens of other musical celebrities; she sang before and met the
Emperor; and in 1921 she came to America. One of the most
interesting bits of her book concerns a rehearsal of “Tosca” at which
she slipped and fell. She sang “Vissi d’arte” where she lay, exciting
Puccini’s enthusiasm. He exclaimed that always he had needed
something to make the aria stand out and command attention; and
this did it! When it was announced that Jeritza was to sing in “Tosca”
in New York, there was a noticeable wave of hostility from those who
associated the rôle exclusively with Geraldine Farrar. It vanished
after she had appeared.
Among the photographs with which Jeritza’s book is illustrated are
many extremely beautiful pictures of the singer in her various rôles.
The chapters on “How an Opera Singer Really Lives,” “Studying with
Sembrich,” “Singing for the Phonograph,” and “Some Guest
Performances” will especially repay students of the voice.
The book by Mrs. Keyes, wife of the United States Senator from
New Hampshire, is in a class by itself. Letters from a Senator’s Wife
consists entirely of actual letters written to old friends who were
some distance away from Washington and who had a full feminine
curiosity about life there. Taken as they stand, Mrs. Keyes’s letters
form a pretty complete record of social and political life in the capital
as seen from the inner official circle. Beginning with her first
impressions of Washington, Mrs. Keyes goes on to describe the
Harding inauguration, the burial of the Unknown Soldier, the arms
conference, the agricultural conference in 1922 and the industrial
conference in 1923; the dedication of the Lincoln Memorial; the
presentation of a gram of radium to Madame Curie; the diplomatic
and New Year’s receptions at the White House; the convention of
women’s organizations at which Lady Astor was conspicuous;
dinners, teas, an afternoon cruise as Mrs. Harding’s guest on the
Mayflower and social affairs innumerable.
The result is a picture of Washington exactly as a woman in Mrs.
Keyes’s place would be privileged to see it; women readers will have
a sense of participating in the things described. It is, I should say,
exclusively a woman’s book; but no one who appreciates the
average woman’s enjoyment of social detail will underestimate what
Mrs. Keyes has accomplished. But in addition to telling the reader
what she would have to do, whom she would meet, and what
functions she would attend if she were in the Washington circle, the
book does really constitute an attractive record of current history in
the making and as made. Women who read it can scarcely fail to
become more intelligent than before.
v
Fortunately Maurice Francis Egan, one of the most beloved of
Americans, lived to complete for us his Recollections of a Happy
Life. The author of Everybody’s St. Francis, Ten Years Near the
German Frontier, Confessions of a Book-Lover and other volumes
had a scroll of memories which began in Philadelphia in the 1850s
and which included political and social Washington in the Civil War
period. In Recollections of a Happy Life the New York of the Henry
George era is touched in with delightful anecdotes of Richard
Watson Gilder and the group that surrounded him; there is a crisp
picture of Indiana where Dr. Egan was professor of English at Notre
Dame; and the book fairly launches itself with a full record of life in
Washington and of the author’s close association with Presidents
McKinley, Roosevelt, Taft and Wilson, under the last three of whom
Dr. Egan held the post of Minister to Denmark. Scholar, poet, critic,
and most winning of companions, Dr. Egan’s autobiography reflects
a good deal of America in the past half-century as well as his own
varied experiences here and abroad.
Of even more definitely literary interest is C. K. S. An
Autobiography, by Clement K. Shorter. An indefatigable book
collector whose library is rich in first editions, original manuscripts,
and autograph letters, Mr. Shorter is probably best known as an
editor and dramatic critic. He has had thirty years in each rôle, and
still writes weekly causeries which carry, on occasion, a provocative
sting. George Meredith, Stevenson, Andrew Lang, Thomas Hardy,
and Gissing each are the subject of a chapter founded primarily on
personal impressions of the man.
Such personal impressions, mixed with estimates of the writer’s
work, form the substance of The Literary Spotlight, edited, with an
introduction, by John Farrar, editor of The Bookman. These
anonymous literary portraits have been aptly called “Mirrors of
Literature.” The anonymity has made possible a great deal of
frankness, humor, and penetration worth having, and Mr. Farrar has
added bibliographies, biographical facts and such data as make the
volume handy for reference. Edna Ferber, Sinclair Lewis, F. Scott
Fitzgerald, Floyd Dell, Mary Johnston, Edwin Arlington Robinson and
others of high contemporary interest are presented.
The Truth at Last!

Robert Louis Stevenson: A Critical Biography, by John A. Steuart.
Two volumes. This new biography, by an English writer, will throw
much new light on Stevenson. From unpublished documents in
Edinburgh and elsewhere, and from several people who knew
Stevenson, Mr. Steuart has obtained facts never before printed—so
the portrait he draws is somewhat different from those which have
already appeared. This biography will be of much interest to the
many admirers of Stevenson’s work who are not afraid to see the
man as he actually was in his strength and his weakness, his gaiety
and his gloom. Photogravure frontispieces.
The Truth at Last, by Charles Hawtrey, edited, with an introduction,
by W. Somerset Maugham. The amusing, frankly self-revealing
memoirs of a famous English actor, well remembered in America for
his tours in “A Message from Mars” and “The Man from Blankley’s.”
Illustrated.
Forty Years in Washington, by David S. Barry. Reminiscences of
Presidents, Cabinet members, Senators and Congressmen, by the
Sergeant-at-Arms of the Senate, who was Washington
correspondent of The Sun, New York, when Charles A. Dana was its
editor. Illustrated.
The Life of Olive Schreiner, by S. C. Cronwright-Schreiner. The
biography, by her husband, of the brilliant author of Dreams and The
Story of an African Farm, a woman of extraordinary personality who
was not only a writer of genius but a pioneer advocate of woman’s
freedom. Illustrated.
Remembered Yesterdays, by Robert Underwood Johnson. Mr.
Johnson’s reminiscences are unusually entertaining and novel, and
their diversity is exceptional. As a stripling he went to New York to
join the staff of Scribner’s Monthly, afterward known as the Century
Magazine, with which he was connected for forty years, as associate
editor and as editor-in-chief. Highly interesting are his touch-and-go
reminiscences of famous Americans and foreign visitors, his
anecdotes of travel abroad, and the account of his service as
Ambassador to Italy in Wilson’s second term. The portraits of
American men of letters from the Civil War to the present are vividly
drawn. No recent volume of American recollections keeps the reader
in a more tolerant and gracious atmosphere. Illustrated.

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Analysis for Financial Management

13th Edition Robert Higgins

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FINANCIAL MANAGEMENT Fundamentals of Corporate Finance INTERNATIONAL FINANCE

ANALYSIS FOR FINANCIAL MANAGEMENT

hig42632_fm_ise.indd iv 12/06/21 08:07 PM

Preface xii PART FOUR

Preface xii The Value Problem 56

Too Much Growth 114 Efficient Markets 166

PART FOUR Estimating Investment Risk 291

investment appraisal. The book concludes with an examination of business

Changes in the Thirteenth Edition

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Assessing the Financial

Financial statements are like fine perfume; to be sniffed but not

Accounting is the scorecard of business. It translates a company’s diverse

The Cash Flow Cycle

FIGURE 1.1 The Cash Flow–Production Cycle

activities, method of operation, and competitive strategy all fundamentally

creation of products. It is as though every item passing through the business

Overview of Financial Statements

The following six transactions summarize WWS’s activities over the

TABLE 1.1 Worldwide Sports Financial Transactions 2021 ($ thousands)

$250,000 plus or minus the cash involved in each transaction. Incidentally,

FIGURE 1.2 Ties among Financial Statements

Cash flow Income

Assets at end = Liabilities at end + Equity at end

The Balance Sheet

Polaris Inc.’s balance sheet equation for 2020 is

Current Assets and Liabilities

TABLE 1.2 Polaris Inc. Balance Sheets ($ millions)*

*Totals may not add due to rounding.

Accountants also arbitrarily define any asset or liability that is expected to

hig42632_fm_ise.indd iv 12/06/21 08:07 PM

hig72365_fm_i-xx.indd xv 12/22/21 03:17 PM

Net cash flow = Net income + Noncash items