Chemalite Inc. Case Study Solution

1

Proforma Cash Flow Statement of Chemalite for 1992 (Indirect Method) Particulars Operating Cash Flow Net Income (+) Depreciation Amortization of Patent Depreciation of Inventory Increase in DTL (-) Increase in A/R Increase in Raw Material Inventory Increase in Finished Goods Inventory Increase in Prepaid Insurance Decrease in Taxes Payable Gain on Sale of Machines Net Cash Flow from Operation Activities Investing Cash Flow (+) Receipts from Sale of Machines (-) Purchase of New Machines Purchase of New Production Facility Net Cash Flow from Investing Activities Financial Cash Flow (+) Long term debts Short term debts (-) Treasury Stock Dividends Paid Net Cash Flow from Financing Activities Opening Cash Balance Net Cash Flow Closing Cash Balance

992 (Indirect Method) Amount Claculations $ $ $ $ $ $ $ $ $ $ $ $

118,995 61,625 25,000 5,000 26,730 -70,030 -20,450 -104,680 -65,000 -950 -24,250 -48,010

$ $ $ $

215,500 -520,000 -425,000 -729,500

$ $ $ $ $

510,000 200,000 -26,000 -10,000 674,000

$ $ $

113,000 -103,510 9,490

Machine BV Machine sold at Depriciation/year

$ 212,500 $ 215,500 $ 21,250

Production Facility Land Building Depriciation/year P1 92 P2 94 P3 95 P3 96

$ $ $ $ $ $ $ $

New Mahcines Depriciation/year

$ 520,000 $ 52,000

850,000 250,000 600,000 85,000 425,000 141,667 141,667 141,667

No. of Shares Price/Share Repurchase Shares

20,000 1.3 26,000

$ $

LTD STD

$ 510,000 $ 200,000

91 Dividend 92 Dividend Common Stock

$

0.02 $ 10% 500000

10%

10,000

2

Proforma Cash Flow Statement of Chemalite for 1992 (Direct Method) Particulars Operating Cash Flow (+) Cash Received from Sales (-) Expenses Raw Material Finised Goods Inventory (-) Labour Insurance Rent Utilities Advertising S&A Expenses Interest Expense R&D Expenses Tax Expense Net Cash Flow from Operation Activities Investing Cash Flow (+) Receipts from Sale of Machines (-) Purchase of New Machines Purchase of New Production Facility Net Cash Flow from Investing Activities Financial Cash Flow (+) Long term debts Short term debts (-) Treasury Stock Dividends Paid Net Cash Flow from Financing Activities Opening Cash Balance Net Cash Flow Closing Cash Balance

3

Main sources and uses of cash Sources Cash from Sales Cash from Sales of Machines Long Term Debt Short Term Debt

4

Recommendations A B C

Reduce credit time of borrowers from 40 days to 30 days, thereby increa Reduce inventory of finished goods. Management to decide an optimum Look to source raw material and other supplies on credit. This will help t

1992 (Direct Method) Amount Claculations $

1,816,220

$ $ $ $ $ $ $ $ $ $ $ $

-473,150 -99,680 -660,000 -97,500 -25,000 -82,000 -70,000 -195,750 -58,750 -63,250 -39,150 -48,010

$ $ $ $

215,500 -520,000 -425,000 -729,500

$ $ $ $ $

510,000 200,000 -26,000 -10,000 674,000

$ $ $

113,000 -103,510 9,490

$ $ $ $

1,816,200 215,500 510,000 200,000

Machine BV Machine sold at Depriciation/year

$ 212,500 $ 215,500 $ 21,250

Production Facility Land Building Depriciation/year P1 92 P2 94

$ $ $ $ $ $

P3 95 P3 96

$ 141,667 $ 141,667

New Mahcines Depriciation/year

$ 520,000 $ 52,000

850,000 250,000 600,000 85,000 425,000 141,667

No. of Shares Price/Share Repurchase Shares

$ $

LTD STD

$ 510,000 $ 200,000

91 Dividend 92 Dividend Common Stock

$

Uses Purchase of New Machines Purchase of New Facility Raw Material Labour S&A Expenses

20,000 1.3 26,000 10%

0.02 $ 10% 500000

10,000

$ $ $ $ $

520,000 425,000 473,150 660,000 195,750

s to 30 days, thereby increasing cash flow, reducing A/R and reducing short term borrowing liabilities ment to decide an optimum level. Unsold products increases opportunity costs and reduces cash flow. es on credit. This will help to maintain cash flow at firm's end.

borrowing liabilities d reduces cash flow.