Description
This is document explaining the cash flow analysis.
Cash Flow Analysis
Of Alpha, Beta and Gamma Corporation
Questions
1. What were the firm’s major sources of cash? Its major uses of cash?
Alpha Corporation
Sources: ? Decrease in Inventory ? Decrease in Accounts Receivable ? Proceeds from disposal of depreciable and other assets. ? Proceeds from sale of discontinued operations. ? Proceeds from long-term debt ? Proceeds from stock issuance Uses: ? Decrease in accounts payable and other current liabilities ? Investment in depreciable assets ? Investment in capitalized software ? Other investments ? Dividends Paid ? Purchase of Treasury Stock ? Payments of long-term debt ? Decrease in Short-term borrowings The cash flow from operations was greater than the net income (loss for company Alpha). Reasons for difference: The two amounts differ because of
Company Beta Corporation
Sources: ? Cash Received ? Interest Received ? Proceeds from Issuance of Common stock Uses: ? Cash paid to suppliers and employees ? Interest Paid ? Income Taxes paid ? Capital Expenditures ? Marketable Securities Purchases ? Payment of subordinated debt ? Payment under equipment line of credit ? Payment under capital lease obligations
Gamma Corporation
Sources: ? Decrease in accounts receivable ? Decrease in Inventories ? Proceeds from issuance of debt ? Issuance of treasury shares, including tax benefits Uses: ? Increase in prepaid expenses ? Increase in accounts payable ? Decrease in tax payable ? Purchase of plant, property and equipment ? Increase of other assets (net) ? Purchase of kienzle business ? Payments to retire debt ? Purchase of treasury shares
2. Was cash flow from operations greater than or less than
The cash flow from operations was less than the net income.
The cash flow from operations was greater than the net income (loss for company Gamma). Reasons for difference: Reasons for difference: It can be seen from the Exhibit 2 that As seen from Exhibit 3 there is a high
net income? Explain in detail the major reasons for the difference between these two figures?
the nature of expenses which are inflicted in the earnings of the company but they don’t result in cash outflow/inflow. Thus expenses like depreciation, amortization of capitalized software, expenses on restructuring and other unusual items, changes in accounts payable/receivables and inventory are the major factors for which the amounts differ. Proceeds from disposal of depreciable and other assets and from sale of discontinued operations has helped in meeting the investment requirements. If the above two activities were not done then it wasn’t possible for the cash generated from the operating activities to meet its capital expenditures.
3. Was the firm able to generate enough cash from operations to pay for all of its capital expenditures? 4. Did the cash flow from operations cover both the capital expenditures and the firm’s dividend payments, if any? 5. If it did, how did the firm invest its
the there has been considerable increase in the accounts receivable. Also increase in inventory and in deposits and other assets has contributed to the decrease in cash flow. Adjustments are done for bad debt, depreciation and amortization and accounts payable but the increase in accounts receivable being high the net cash generated from operating activities comes below the net income. Here the firm wasn’t able to generate enough cash from its operating activities to cover its investment costs.
amount of depreciation and amortization levied on retained earnings which has made the net income amount below the net cash generated from operating activities. Other adjustments to accounts receivable/payable, inventory, taxes, deferred revenue and restructuring reserves also explain the difference between the operating activities cash and net income. The cash generated from the operating activities is more than the net cash flow from investing activities (negative in this case). In this case the investments are done in acquiring plant, property, equipment and Kienzle business. Cash generated from operating activities can cover these investment costs. Dividend entry is not given
No dividend is paid in the year 1991 Dividend entry is not given in this and for the capital expenditure case. Proceeds from disposal of depreciable and other assets and from sale of discontinued operations has helped in meeting the investment requirements. If the above two activities were not done then it wasn’t possible for the cash generated from the operating activities to meet its capital expenditures. Since disposal of assets covered No excess cash investment activities the cash generated from operating activities
Not much cash to invest. The investments which are done reduces the cash reserves of the last year.
excess cash? 6. If not, what were the sources of cash the firm used to pay for the capital expenditures and / or dividends? 7. Were the working capital (current assets and current liability) accounts other than cash and cash equivalents primarily sources of cash, or users of cash? 8. What other major items affected cash flows?
was used to majorly pay the longterm debt. Proceeds from disposal of depreciable and other assets and proceeds from sale of discontinued operations helped the firm finance its investing activities.
Company used proceeds from the Dividend entry is not given and in issuance of common stock to finance this company the cash generated its capital expenditure. from operating activities was enough from covering capital expenditure
The net sum of the current assets and current liabilities in this case is positive so the working capital is a primary source of cash.
Net cash generated by operating activities is positive. Also the cash and cash equivalent of the previous year didn’t decrease. So we can say that the working capital has been source of cash but to cover investments in long term assets cash was generated from the issuance of common stock
In this case Cash and Cash Equivalents has decreased from the previous year. We can see that a good amount of cash has been generated from operating activities. This cash has been used to finance the investing activities of the company. So we can say that working capital of the company has acted as sources of cash.
Investment in Depreciable assets and payment of long-term debt has affected the cash flows
Payments to suppliers and employees, payments of debt and equipment credit are some of the transactions that has affected the cash flow
Other major items affecting cash flow are Investment in plant, property, equipment, other assets and Kienzle business
Trend In Alpha Corporation
Net Income? There is no consistency in the trend. First of all the corporation incurred loss all the three years. From 1989 to 1990 it decreased by 95% and from 1990 to 1991 it increased by 40% compared to the previous year. Continuous increase from the year 1989 to 1991 From 1989 to 1990 the capital expenditure increased and it decreased during the period 1990 to 1991 Decreased from the year 1989 to 1990 and no dividend was given in 1991 In 1989 majorly cash was borrowed by the way of long term debt and short term borrowings whereas in the other two years i.e. 1990 and 1991 majorly payments was done to reduce the long and short term borrowings. The payment for the debts was more in the year 1990 and less in 1991.
Company Beta Corporation
Continuous increase from the year 1989 to 1991.
Gamma Corporation
Continuous decrease from the year 1989 to 1991.
Cash Flow from (continuing) operations? Capital Expenditures?
Cash flow increased by 90.7% from 1989 to 1990 and it decreased by 44% Increasing capital expenditure
Continuous decrease from the year 1989 to 1991. Decreasing capital expenditure
Dividends?
Information is not available
Information is not available
Net borrowing (proceeds less payments of shortand long-term debt)?
There is no mention for the long and short term borrowings in this case. But an entry is done for subordinated debt. Analysing its trend tells that in 1989 the debt was taken and in 1991 it was paid back.
Working capital
Continuous increase in the working
Continuous decrease in the working
Here also no mention is done for the long and short term borrowings. But payments are done to retire debt and proceeds were from issuance of debt. For proceeds from issuance of debt the trend has been continuously decreasing and for payments to retire debt the trend has been of decreasing and increasing one. It decreased from year 1989 to 1990 and it increased from 1990 to 1991. Increasing trend in all the three
II.
accounts?
capital
capital
years
III. Financial status of the business Alpha Corporation
There is an increase in the cash and cash equivalents at the end of the year 1991. Investment in long term assets and disposal of depreciation assets has balanced each other. Also partial payment of long-term debt has been done. So we can see that the business has a good cash status. Thus in short term the business has a good financial status. The only major concern is the losses which the business is incurring every year. So we cannot definitely say that the business will be able to sustain in the long run. This will depend on the nature of the business. If the company is in capital intensive business like steel production then it has to bear losses for some time but the future is good provided the company carries its operations properly. But if the company is in entertainment business then the long term prospect of the corporation looks bleak.
Beta Corporation
For this company cash and cash equivalent has increased by 127%. Also various debts have been paid in this year which reduces the liability of the company. Again investments in longterm assets are done. Decrease in accounts receivable indicates that company has less debit holding in the market. So the increase in cash holdings indicates that company can finance a lot of activities next year. So we can conclusively say that the company has a good financial health.
Gamma Corporation
From the exhibit it is seen that in year 1991 the cash and cash equivalent has decreased. This has resulted because a lot of investments have been done in the long term assets in this financial year. In the short term the firm can face a cash crunching situation because of decrease in cash and cash equivalents. In the long-run, it depends on the type of business the firm is doing. If the business is like an airlines one then initial investment is needed and in the long run the assets will bring profit for the Organisation. But if the business is like an FMCG then it is very difficult to predict that the investments will be beneficial for the company or not.
doc_127303073.docx
This is document explaining the cash flow analysis.
Cash Flow Analysis
Of Alpha, Beta and Gamma Corporation
Questions
1. What were the firm’s major sources of cash? Its major uses of cash?
Alpha Corporation
Sources: ? Decrease in Inventory ? Decrease in Accounts Receivable ? Proceeds from disposal of depreciable and other assets. ? Proceeds from sale of discontinued operations. ? Proceeds from long-term debt ? Proceeds from stock issuance Uses: ? Decrease in accounts payable and other current liabilities ? Investment in depreciable assets ? Investment in capitalized software ? Other investments ? Dividends Paid ? Purchase of Treasury Stock ? Payments of long-term debt ? Decrease in Short-term borrowings The cash flow from operations was greater than the net income (loss for company Alpha). Reasons for difference: The two amounts differ because of
Company Beta Corporation
Sources: ? Cash Received ? Interest Received ? Proceeds from Issuance of Common stock Uses: ? Cash paid to suppliers and employees ? Interest Paid ? Income Taxes paid ? Capital Expenditures ? Marketable Securities Purchases ? Payment of subordinated debt ? Payment under equipment line of credit ? Payment under capital lease obligations
Gamma Corporation
Sources: ? Decrease in accounts receivable ? Decrease in Inventories ? Proceeds from issuance of debt ? Issuance of treasury shares, including tax benefits Uses: ? Increase in prepaid expenses ? Increase in accounts payable ? Decrease in tax payable ? Purchase of plant, property and equipment ? Increase of other assets (net) ? Purchase of kienzle business ? Payments to retire debt ? Purchase of treasury shares
2. Was cash flow from operations greater than or less than
The cash flow from operations was less than the net income.
The cash flow from operations was greater than the net income (loss for company Gamma). Reasons for difference: Reasons for difference: It can be seen from the Exhibit 2 that As seen from Exhibit 3 there is a high
net income? Explain in detail the major reasons for the difference between these two figures?
the nature of expenses which are inflicted in the earnings of the company but they don’t result in cash outflow/inflow. Thus expenses like depreciation, amortization of capitalized software, expenses on restructuring and other unusual items, changes in accounts payable/receivables and inventory are the major factors for which the amounts differ. Proceeds from disposal of depreciable and other assets and from sale of discontinued operations has helped in meeting the investment requirements. If the above two activities were not done then it wasn’t possible for the cash generated from the operating activities to meet its capital expenditures.
3. Was the firm able to generate enough cash from operations to pay for all of its capital expenditures? 4. Did the cash flow from operations cover both the capital expenditures and the firm’s dividend payments, if any? 5. If it did, how did the firm invest its
the there has been considerable increase in the accounts receivable. Also increase in inventory and in deposits and other assets has contributed to the decrease in cash flow. Adjustments are done for bad debt, depreciation and amortization and accounts payable but the increase in accounts receivable being high the net cash generated from operating activities comes below the net income. Here the firm wasn’t able to generate enough cash from its operating activities to cover its investment costs.
amount of depreciation and amortization levied on retained earnings which has made the net income amount below the net cash generated from operating activities. Other adjustments to accounts receivable/payable, inventory, taxes, deferred revenue and restructuring reserves also explain the difference between the operating activities cash and net income. The cash generated from the operating activities is more than the net cash flow from investing activities (negative in this case). In this case the investments are done in acquiring plant, property, equipment and Kienzle business. Cash generated from operating activities can cover these investment costs. Dividend entry is not given
No dividend is paid in the year 1991 Dividend entry is not given in this and for the capital expenditure case. Proceeds from disposal of depreciable and other assets and from sale of discontinued operations has helped in meeting the investment requirements. If the above two activities were not done then it wasn’t possible for the cash generated from the operating activities to meet its capital expenditures. Since disposal of assets covered No excess cash investment activities the cash generated from operating activities
Not much cash to invest. The investments which are done reduces the cash reserves of the last year.
excess cash? 6. If not, what were the sources of cash the firm used to pay for the capital expenditures and / or dividends? 7. Were the working capital (current assets and current liability) accounts other than cash and cash equivalents primarily sources of cash, or users of cash? 8. What other major items affected cash flows?
was used to majorly pay the longterm debt. Proceeds from disposal of depreciable and other assets and proceeds from sale of discontinued operations helped the firm finance its investing activities.
Company used proceeds from the Dividend entry is not given and in issuance of common stock to finance this company the cash generated its capital expenditure. from operating activities was enough from covering capital expenditure
The net sum of the current assets and current liabilities in this case is positive so the working capital is a primary source of cash.
Net cash generated by operating activities is positive. Also the cash and cash equivalent of the previous year didn’t decrease. So we can say that the working capital has been source of cash but to cover investments in long term assets cash was generated from the issuance of common stock
In this case Cash and Cash Equivalents has decreased from the previous year. We can see that a good amount of cash has been generated from operating activities. This cash has been used to finance the investing activities of the company. So we can say that working capital of the company has acted as sources of cash.
Investment in Depreciable assets and payment of long-term debt has affected the cash flows
Payments to suppliers and employees, payments of debt and equipment credit are some of the transactions that has affected the cash flow
Other major items affecting cash flow are Investment in plant, property, equipment, other assets and Kienzle business
Trend In Alpha Corporation
Net Income? There is no consistency in the trend. First of all the corporation incurred loss all the three years. From 1989 to 1990 it decreased by 95% and from 1990 to 1991 it increased by 40% compared to the previous year. Continuous increase from the year 1989 to 1991 From 1989 to 1990 the capital expenditure increased and it decreased during the period 1990 to 1991 Decreased from the year 1989 to 1990 and no dividend was given in 1991 In 1989 majorly cash was borrowed by the way of long term debt and short term borrowings whereas in the other two years i.e. 1990 and 1991 majorly payments was done to reduce the long and short term borrowings. The payment for the debts was more in the year 1990 and less in 1991.
Company Beta Corporation
Continuous increase from the year 1989 to 1991.
Gamma Corporation
Continuous decrease from the year 1989 to 1991.
Cash Flow from (continuing) operations? Capital Expenditures?
Cash flow increased by 90.7% from 1989 to 1990 and it decreased by 44% Increasing capital expenditure
Continuous decrease from the year 1989 to 1991. Decreasing capital expenditure
Dividends?
Information is not available
Information is not available
Net borrowing (proceeds less payments of shortand long-term debt)?
There is no mention for the long and short term borrowings in this case. But an entry is done for subordinated debt. Analysing its trend tells that in 1989 the debt was taken and in 1991 it was paid back.
Working capital
Continuous increase in the working
Continuous decrease in the working
Here also no mention is done for the long and short term borrowings. But payments are done to retire debt and proceeds were from issuance of debt. For proceeds from issuance of debt the trend has been continuously decreasing and for payments to retire debt the trend has been of decreasing and increasing one. It decreased from year 1989 to 1990 and it increased from 1990 to 1991. Increasing trend in all the three
II.
accounts?
capital
capital
years
III. Financial status of the business Alpha Corporation
There is an increase in the cash and cash equivalents at the end of the year 1991. Investment in long term assets and disposal of depreciation assets has balanced each other. Also partial payment of long-term debt has been done. So we can see that the business has a good cash status. Thus in short term the business has a good financial status. The only major concern is the losses which the business is incurring every year. So we cannot definitely say that the business will be able to sustain in the long run. This will depend on the nature of the business. If the company is in capital intensive business like steel production then it has to bear losses for some time but the future is good provided the company carries its operations properly. But if the company is in entertainment business then the long term prospect of the corporation looks bleak.
Beta Corporation
For this company cash and cash equivalent has increased by 127%. Also various debts have been paid in this year which reduces the liability of the company. Again investments in longterm assets are done. Decrease in accounts receivable indicates that company has less debit holding in the market. So the increase in cash holdings indicates that company can finance a lot of activities next year. So we can conclusively say that the company has a good financial health.
Gamma Corporation
From the exhibit it is seen that in year 1991 the cash and cash equivalent has decreased. This has resulted because a lot of investments have been done in the long term assets in this financial year. In the short term the firm can face a cash crunching situation because of decrease in cash and cash equivalents. In the long-run, it depends on the type of business the firm is doing. If the business is like an airlines one then initial investment is needed and in the long run the assets will bring profit for the Organisation. But if the business is like an FMCG then it is very difficult to predict that the investments will be beneficial for the company or not.
doc_127303073.docx