The Assumptions
The company will be aiming at an annual revenue growth rate of 16% per year in first three years of its operations. The promoters will acquire 100% of the initial capital outlay and intend to borrow at regular intervals for development of the business. The period of first loan will be 10 years with interest rate of 9%.
The Income Statement
The revenues to be generated by the company will remain sensitive to many external environmental factors which may be beyond its control. The business of charter flights is largely an economic luxury and gets low if there is an economic recession. The Company will face problems during recession as the top line income from businesses and wealthy clients may come down due to lesser luxury spending.
The Balance Sheet
Broadly, the promoters’ purpose from this business is to earn from arranged flights on behalf of large organizations (primarily corporations) and wealthy individuals that are seeking to fly on non-scheduled flights and private aircraft. The cost of a charter flight can range between $5,000 for a small jet to above $150,000 for a full sized airplane which can transport a large group of people.
Direct Method Cash Flow Statement
The Direct Method Cash Flow Statement is easy to read because of its format as all the operating cash receipts and the payments during the specific period are shown by source. This method determines the net cash flows from the operating activities by taking into account the cash receipts from sales, adding interest and dividends and then deducting cash payments made for purchases, operating expenses, interest payments and income tax payments. This is the main factor which puts the direct method in advantages over the indirect method.
Since the direct method takes into account the sources of the cash, it is recommended by FASB for all companies for preparing their cash flow statements. On the other hand, the indirect method computes operating cash flows by adjusting the net income for current year with changes in the balance sheet accounts. Since most big companies do not record their accounting information on the basis of their customers, suppliers or vendors, they find that this method is difficult to maintain.
It becomes more laborious for such large companies to compile such information for using this method. They must keep in mind that this method works perfectly only when accounts receivable are used only for credit sales and the accounts payable are used only for credit account purchases. Lack of understanding is the reason why most companies do not use this method.
