Beta Company-Three Examples

Analysis of Cash Flow Statement Alpha Company Year-1989 1

For each of the years on the Statement of Cash Flows: 1. What was the firm’s major sources of cash? Its major use of cash? Major sources of cash are proceeds from long-term debt and short term borrowings. Major uses of cash would be investment in depreciable assets and payments of long-term debt 2. Was cash flow from operations greater than or less than net income? Explain in detail the major reasons for the difference between these two figures Cash from operations is greater than that from net income. The increase in net operating cash can be accounted to: •

Depreciation:- The value is subtracted in net income, but not from cash as it does not result in any cash

•

Restructuring and other unusual item:- This reduces the net income, however it doesn’t affect the net cash

3. Was the firm able to generate enough cash from operations to pay for all capital expenditures? The firm was not able to generate enough cash from operations to fund its capital expenditures 4. Did the cash flow from operations cover both the capital expenditures and firm’s dividend payment, if any? The firm was not able to generate enough cash from operations to fund its capital expenditures and dividend payments 5. If it did, how did the firm invest its excess cash? 6. If not, what were the sources of cash the firm used to pay for the capital expenditures and/or dividends? Sources of cash used to pay for capital expenditures and/or dividends are proceeds from long-term debt and short term borrowings. 7. Were the working capital (current asset and current liability) accounts other than cash and cash equivalents primarily sources of cash, or users of cash? Net working capital account is primarily a source of cash.

8. What other items affected cash flow? The purchase of treasury stocks and effect of changes in foreign exchange are other users of cash.

Year-1990 I

For each of the years on the Statement of Cash Flows: 1. What were the firm’s major sources of cash? Its major use of cash? Major sources of cash are sale of discontinued operations and disposal of depreciable and other assets.Major uses of cash would be payments of long-term debt and short-term borrowings 2. Was cash flow from operations greater than or less than net income? Explain in detail the major reasons for the difference between these two figures Cash from operations is greater than that from net income. The increase in net operating cash can be accounted to: •

Depreciation:- The value is subtracted in net income, but not from cash as it does not result in any cash

•

Inventory:- The adjustment of inventory also increases the net cash from operations in comparison to net income. This increase is because of sales of inventory which was created before the current period.

•

Accounts Receivable:- The adjustment of accounts receivable also increases the net cash from operations in comparison to net income. This increase is because of payments of accounts receivable existing towards that in opening balance.

•

Restructuring and other unusual item:- This reduces the net income, however it doesn’t affect the net cash

3. Was the firm able to generate enough cash from operations to pay for all capital expenditures? The firm was not able to generate enough cash from operations to fund its capital expenditures 4. Did the cash flow from operations cover both the capital expenditures and firm’s dividend payment, if any? The firm was not able to generate enough cash from operations to fund its capital expenditures and dividend payments

5. If it did, how did the firm invest its excess cash? 6. If not, what were the sources of cash the firm used to pay for the capital expenditures and/or dividends? Sources of cash used to pay for capital expenditures and/or dividends are proceeds from long-term debt and that of sales of depreciable assets and discontinued operations 7. Were the working capital (current asset and current liability) accounts other than cash and cash equivalents primarily sources of cash, or users of cash? Net working capital account is primarily an user of cash. 8. What other items affected cash flow? The purchase of treasury stocks and effect of changes in foreign exchange are other users of cash.

Year-1991 I

For each of the years on the Statement of Cash Flows: 1. What was the firm’s major sources of cash? Its major use of cash? Major sources of cash are proceeds from disposal of depreciable and other assets and cash from operating expenses. Major uses of cash would be payments of long-term debt and investment in depreciable assets. 2. Was cash flow from operations greater than or less than net income? Explain in detail the major reasons for the difference between these two figures Cash from operations is greater than that from net income. The increase in net operating cash can be accounted to: •

Depreciation:- The value is subtracted in net income, but not from cash as it does not result in any cash

•

Inventory:- The adjustment of inventory also increases the net cash from operations in comparison to net income. This increase is because of sales of inventory which was created before the current period.

•

Accounts Receivable:- The adjustment of accounts receivable also increases the net cash from operations in comparison to net income. This increase is because of payments of accounts receivable existing towards that in opening balance.

•

Restructuring and other unusual item:- This reduces the net income, however it doesn’t affect the net cash

3. Was the firm able to generate enough cash from operations to pay for all capital expenditures? The firm was not able to generate enough cash from operations to fund its capital expenditures 4. Did the cash flow from operations cover both the capital expenditures and firm’s dividend payment, if any? The firm was not able to generate enough cash from operations to fund its capital expenditures and dividend payments 5. If it did, how did the firm invest its excess cash? 6. If not, what were the sources of cash the firm used to pay for the capital expenditures and/or dividends? Sources of cash used to pay for capital expenditures and/or dividends are proceeds from long-term debt and that of sales of depreciable assets and discontinued operations 7. Were the working capital (current asset and current liability) accounts other than cash and cash equivalents primarily sources of cash, or users of cash? Net working capital account is primarily a source of cash. 8. What other items affected cash flow? The purchase of treasury stocks and effect of changes in foreign exchange are other users of cash.

Trends 1. Net income We can see that the net income is showing an increasing trend after the dip in the previous year. 2. Cash Flow from (continuing) operation The cash flow from operations is continuously increasing from 19891991 3. Capital Expenditure The capital expenditure of the company is decreasing from 19891991

4. Dividend The dividend has been decreasing continuously for the previous three years. 5. Net Borrowing The net borrowing of the company is increasing from a dip in the previous year. 6. Working Capital Account The working capital of the company is showing a increasing trend after the dip in the previous year.

III As we can see from the statement of cash flows, the net income is increasing every year. Also, the cash flow from operating activities is increasing. The capital expenditure of the company is decreasing which means the company is becoming more stable. Also, the working capital of the company is increasing. Though the net borrowing of the company has increased, since net cash flow has increased the overall picture of the company seems to be healthy.

Exhibit 1-Beta Corporation Year-1989 1

For each of the years on the Statement of Cash Flows: 1

What was the firm’s major sources of cash? Its major use of cash? The major source of cash is Proceeds of subordinated debts and Cash from operating activities. The major use of cash is towards Capital Expenditure

2. Was cash flow from operations greater than or less than net income? Explain in detail the major reason for difference between these two figures? Cash flow from operations was greater than that from net income. This is because a major chunk of the increase in net income can be attributed to:

•

Depreciation and amortization: This value is deducted from net income, but not from net cash as it does not result in any cash flow.

•

Decrease in Inventory: The decrease in inventory is not marked in net income as this value was already accounted in a previous financial year. But the cash arising out of this transaction was realized only in this financial year. Hence, it results in an increase in net cash.

•

Similarly, a payment towards accounts payable and accrued expenses for a previous year results in an increase in net cash, but does not change the net income.

3. Was the firm able to generate enough cash from operations to pay for all capital expenditures? Since the net cash from operating activities accounted to $3670 mn while the capital expenditure was $3650 mn. , the cash from operating income was sufficient to fund the capital expenditure.

4. Did the cash flow from operations cover both the capital expenditures and firm’s dividend payment, if any? Yes, the cash flow from operations cover both capital expenditures and firm’s dividend payments. 5. If it did, how did the firm invest its excess cash? The excess cash can be used for payments towards working line, equipment line or capital lease obligations. 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? The working capital accounts other than that of cash and cash equivalents are primarily users of cash.

8. What other major items affected cash flow? The other major sources of cash were proceeds from issuance of common stock. Similarly, the other major users of cash were net payments towards working capital line and equipment line of credit. Similarly, payments towards capital lease obligations is also an user of cash. Year-1990 I For each of the years on the Statement of Cash Flows: 1. What was the firm’s major sources of cash? Its major use of cash? The major source of cash is Cash from operating activities. The major use of cash is towards Capital Expenditure 2. Was cash flow from operations greater than or less than net income? Explain in detail the major reason for difference between these two figures? Cash flow from operations was greater than that from net income. This is because a major chunk of the increase in net income can be attributed to: •

Depreciation and amortization: This value is deducted from net income, but not from net cash as it does not result in any cash flow.

3. Was the firm able to generate enough cash from operations to pay for all capital expenditures? Since the net cash from operating activities accounted to $7000 mn while the capital expenditure was $4600 mn. , the cash from operating income was sufficient to fund the capital expenditure.

4. Did the cash flow from operations cover both the capital expenditures and firm’s dividend payment, if any? Yes, the cash flow from operations cover both capital expenditures and firm’s dividend payments. 5. If it did, how did the firm invest in excess cash? The excess cash can be used for payments towards working line, equipment line or capital lease obligations. In fact the excess cash is sufficient for payment towards all these financing activities. 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? The working capital accounts other than that of cash and cash equivalents are primarily users of cash. 8. What other major items affected cash flow? The other major sources of cash were proceeds from issuance of common stock. Similarly, the other major users of cash were net payments towards working capital line and equipment line of credit. Similarly, payments towards capital lease obligations is also an user of cash.

Year-1991 I For each of the years on the Statement of Cash Flows: 1. What was the firm’s major sources of cash? Its major use of cash? The major source of cash is Proceeds from the issuance of common stock. The major use of cash is towards purchases for marketable securities and capital expenditures. 2. Was cash flow from operations greater than or less than net income? Explain in detail the major reason for difference between these two figures? Cash flow from operations was less than that from net income. The major reason for the difference between net income and net cash can be attributed to: •

Depreciation and amortization: This value is deducted from net income, but not from net cash as it does not result in any cash flow.

•

Increase in accounts receivable: As a major part of the net income is realized as accounts receivable, the net income increases, but cash flow does not change.

3. Was the firm able to generate enough cash from operations to pay for all capital expenditures?

Since the net cash from operating activities accounted to $3919 mn while the capital expenditure was $6031 mn. , the cash from operating income was insufficient to fund the capital expenditure.

4. Did the cash flow from operations cover both the capital expenditures and firm’s dividend payment, if any? No, the cash flow from operations was insufficient to cover capital expenditures and firm’s dividend payments. 5. If it did, how did the firm invest in excess cash? 6. If not, what were the sources of cash the firm used to pay for the capital expenditures and/or dividends? The capital expenditures were funded from proceeds of issuances of common stock. 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? The working capital accounts other than that of cash and cash equivalents are primarily users of cash. 8. What other major items affected cash flow? The other major sources of cash were proceeds from issuance of common stock. Similarly, the other major users of cash was payments towards capital lease obligations. Similarly, net payments towards working capital line and equipment line of credit is also an user of cash.

II

What was the trend in: 9. Net income The net income is showing a consistent increasing trend as the income is increasing from 1989 to 1991 (from $417 to $6323). 10.Cash Flow from (continuing) operations The cash flow from operations is showing a decreasing trend after an increasing trend in the previous year(1990) 11.Capital Expenditures

The capital expenditure of the firm is increasing which indicates that the firm is increasing more funds to the purchase of fixed-assets 12.Dividends As the company has not provided any dividends till now, it is not possible to assess the trend for dividends 13.Net Borrowings The net borrowings is showing an increasing trend after a dip in the previous year 14.Working Capital Accounts The working capital of the company is showing a consistent increasing trend. III Based on the evidence of Statement of Cash Flows, what is your assessment of the financial strength of the business? Why? The net income of the business is increasing and this shows that the firm is increasing its foothold in the business. The cash flow from operating expenses is showing a decrease in comparison to the previous year. However, the cash received from customers is showing a consistent increase. The decrease in cash flow from operations can be mainly attributed to higher income tax and cash paid to suppliers and employees. Since, this increase can lead to higher source of revenue in future the decrease in cash flow from operations is not worrisome. The capital expenditures of the company is also increasing. This shows that the company is investing heavily in fixed assets which will lead to an increase in production capacity. As for net borrowings it has shown a huge increase over the previous years and this increase is mainly funded by issuance of new stocks. As far as whether the source of funding is sustainable depends on the future net income and dividends paid by the company. The working capital of the company is showing an increasing trend. This is a healthy sign as the excess cash with a company would increase as the working capital increases. Thus based on the evidence of statement of cash flows, the outlook of the company seems healthy.

Gamma Company Year-1989 I For each of the years on the Statement of Cash Flows: 1. What was the firm’s major sources of cash? Its major use of cash?

Major Sources of Cash- Cash from Operating Activities, Proceeds from Issuance of debts and issuance of treasury shares, including tax benefits Major Uses of Cash- Purchase of plant, property, and equipment, Increase in other assets, Payments to retire debt and Purchase of treasury shares 2. Was cash flow from operations greater than or less than net income? Explain in detail the major reason for difference between these two figures?

Cash flow from operations was greater than that from net income. The major reason for the difference between net income and net cash can be attributed to: •

Depreciation and amortization: This value is deducted from net income, but not from net cash as it does not result in any cash flow.

•

Increase in Deferred Revenue and customer advances

3. Was the firm able to generate enough cash from operations to pay for all capital expenditures? The cash from operating income was sufficient to fund the capital expenditure. 4. Did the cash flow from operations cover both the capital expenditures and firm’s dividend payment, if any The cash from operating income was sufficient to fund the capital expenditure and dividend payments. 5. If it did, how did the firm invest in excess cash? The excess cash could be used for funding a portion of payments of increase of other assets, Payments to retire debt or Purchase of treasury shares. 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? The working capital was primarily users of cash 8. What other major items affected cash flow?

The other major items affecting cash flow are: proceeds from issuance of debt, purchase of treasury shares and issuance of treasury shares.

Year-1990 I For each of the years on the Statement of Cash Flows: 1. What was the firm’s major sources of cash? Its major use of cash? Major Sources of Cash- Cash from Operating Activities, Proceeds from Issuance of debts and issuance of treasury shares, including tax benefits Major Uses of Cash- Purchase of plant, property, and equipment, Increase in other assets, Payments to retire debt and Purchase of treasury shares 2. Was cash flow from operations greater than or less than net income? Explain in detail the major reason for difference between these two figures? Cash flow from operations was greater than that from net income. The major reason for the difference between net income and net cash can be attributed to: •

Depreciation and amortization: This value is deducted from net income, but not from net cash as it does not result in any cash flow.

•

Increase in Deferred Revenue and customer advances

•

Increase in restructuring reserve

•

Increase in other liabilities

3. Was the firm able to generate enough cash from operations to pay for all capital expenditures? The cash from operating income was sufficient to fund the capital expenditure. 4. Did the cash flow from operations cover both the capital expenditures and firm’s dividend payment, if any The cash from operating income was sufficient to fund the capital expenditure and dividend payments. 5. If it did, how did the firm invest in excess cash? The excess cash could be used for funding a portion of payments of increase of other assets, Payments to retire debt or Purchase of treasury shares.

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? The working capital was primarily users of cash 8. What other major items affected cash flow? The other major items affecting cash flow are: proceeds from issuance of debt, purchase of treasury shares and issuance of treasury shares and increase in restructuring reserve. Year-1991 I For each of the years on the Statement of Cash Flows: 7. What was the firm’s major sources of cash? Its major use of cash? Major Sources of Cash- Cash from Operating Activities, Proceeds from Issuance of debts and issuance of treasury shares, including tax benefits Major Uses of Cash- Purchase of plant, property, and equipment, Increase in other assets, Purchase of Kienzle business Payments to retire debt and Purchase of treasury shares 8. Was cash flow from operations greater than or less than net income? Explain in detail the major reason for difference between these two figures? Cash flow from operations was greater than that from net income. The major reason for the difference between net income and net cash can be attributed to: •

Depreciation and amortization: This value is deducted from net income, but not from net cash as it does not result in any cash flow.

•

Increase in Deferred Revenue and customer advances

•

Increase in restructuring reserve

•

Increase in other liabilities

9. Was the firm able to generate enough cash from operations to pay for all capital expenditures? The cash from operating income was sufficient to fund the capital expenditure.

10.Did the cash flow from operations cover both the capital expenditures and firm’s dividend payment, if any The cash from operating income was sufficient to fund the capital expenditure and dividend payments. 11.If it did, how did the firm invest in excess cash? The excess cash could be used for funding a portion of payments of increase of other assets, purchase of Kienzle business, Payments to retire debt or Purchase of treasury shares. 12.If not, what were the sources of cash the firm used to pay for the capital expenditures and/or dividends? 13.Were the working capital (current assets and current liability) accounts other than cash and cash equivalents primarily sources of cash, or users of cash? The working capital was primarily a source of cash 14.What other major items affected cash flow? The other major items affecting cash flow are: proceeds from issuance of debt,purchase of Kienzle business, purchase of treasury shares and issuance of treasury shares and increase in restructuring reserve.

II Trends 15.Net income We can see that the net income is continuously decreasing from 19891991( from $1479391 to $1040901) 16.Cash Flow from (continuing) operation The cash flow from operations is continuously decreasing from 19891991 17.Capital Expenditure The capital expenditure of the company is increasing 18.Dividend No dividend has been provided till now. 19.Net Borrowing The net borrowing of the company is increasing from a dip in the previous year.

20.Working Capital Account The working capital of the company is showing a decreasing trend.

III As we can see from the statement of cash flows, the net income is decreasing every year. Also, the cash flow from operating activities is decreasing. This is a major cause of concern. The capital expenditure of the company is also increasing and this is mainly funded by borrowings.( net borrowing is increasing). Also, the working capital of the company is decreasing. This means that the company is going through a negative cycle as most of the indicators have a negative trend. Hence, the company needs to take stock of things and must have a clear plan in future.