The computations of EBITDA (in millions) for Continental AirlinesandSouthwest
Airlinesfor the year ended December 31, 2004, are shown below (in millions).Southwest Continental
Airlines Airlines
Operating income (loss) before interest and taxes $554 $(229)
Depreciation and amortization 431 414
EBITDA $985 $ 185The preceding computations reveal that Southwest has a much higher EBITDA
thanContinental Airlines, even though Southwest is a smaller airline with $6.5 bil-
lion in revenue compared to Continental’s $9.7 billion in revenue. Southwest is
generating more cash from its operations to pay interest and other fixed charges than
is Continental.
As we pointed out earlier, EBITDA is only used as a rough estimate
of cash flow. You should be careful not to confuse EBITDA with net cash
flows from operating activities. For example, Southwest and Continental
reported positive net cash flows from operating activities for 2004 of
$1,157 million and $236 million, respectively. In contrast, the EBITDA for
Southwest and Continental was $985 million and $185 million, respec-
tively. These differences reflect that net cash flows from operating activ-
ities is computed using generally accepted accounting principles. These
principles require the consideration of factors other than just interest,
taxes, depreciation, and amortization in determining cash flows from
operations. For example, increases or decreases in accounts receivable
and inventories affect the amount of cash flows from operations. For this
reason, EBITDA should be interpreted only as a rough estimate of the
cash available to pay interest and other fixed charges, rather than as an
estimate of cash flows from operations.174 Chapter 4 Accounting Information Systems
APPENDIX
The Statement of Cash Flows
The income statement, retained earnings statement, balance sheet, and statement of
cash flows for Online Solutions are shown in Exhibit 12. The income statement, re-
tained earnings statement, and balance sheet can be prepared directly from the ad-
justed trial balance shown in Exhibit 11. Preparing the statement of cash flows, however,
is more complex.
The statement of cash flows for Online Solutions can be prepared by
analyzing the cash account shown in Exhibits 6 and 15. Each of the transactions posted
to the cash account should be classified as affecting cash flows from operating, invest-
ing, or financing activities. This analysis of the cash transactions in chronological or-
der is shown on the following page.© RYAN MCVAY/PHOTODISC/GETTY IMAGES