1. Goodmrng sir, goodmrng everybody. Now I am going to deliver my
presentation on topic that is cashflow analysis of folex company. My
group members are ayush beauty, bhaswati and devanshu.
Now I am going to discuss Indirect method, direct method and interpretation
upon cashflow statement.
3. Q) THE FOLLOWING IS A FOLEX COMPANY’S INCOME STATEMENT AND BALANCE SHEET
(IN MILLIONS):
Income Statement for the year ending 31/12/2013
Sales Rs 750
Cost of Goods Sold -450
Gross Profit Rs 300
Operating Expenses 100
Income before Interest & Taxes Rs 200
Interest expense 15
Income before Taxes Rs 185
Income tax expense 75
Net Income Rs 110
2013 2012
Cash 45 80
Accounts Rec 155 115
Inventory 225 190
Prepaid Insurance 22 32
Total Current Assets 447 417
Property & Equipment 1250 1050
Accumulated depreciation -175 -140
Total Property & Equipment 1075 910
Total Assets 1522 1327
Accounts Payable 120 135
Income Tax Payable 155 175
Total Current Liabilities 275 310
Bonds Payable 400 325
Total Liabilities 675 635
Common Stock 525 475
Retained Earnings 322 217
Total Stockholders' Equity 847 692
Total Liabilities + Equity 1522 1327
4. SOLUTION:
Balance Sheet (in millions)
Assets 2013 2012 Change Net Inflow/Outflow
Cash 45 80 -35 Outflow
Accounts Rec 155 115 40 Inflow
Inventory 225 190 35 Inflow
Prepaid Insurance 22 32 -10 Outflow
Total Current Assets 447 417 30 Net Inflow
Property & Equipment 1250 1050 200 Inflow
Accumulated depreciation -175 -140 -35 Outflow
Total Property & Equipment 1075 910 165 Inflow
Total Assets 1522 1327 195 Net Inflow
Liabilities
Accounts Payable 120 135 -15 Outflow
Income Tax Payable 155 175 -20 Outflow
Total Current Liabilities 275 310 -35 Outflow
Bonds Payable 400 325 75 Inflow
Total Liabilities 675 635 40 Net Inflow
Common Stock 525 475 50 Inflow
Retained Earnings 322 217 105 Inflow
Total Stockholders' Equity 847 692 155 Inflow
Total Liabilities + Equity 1522 1327 195 Net Inflow
5. 1. INDIRECT METHOD
B. Investing
Figures in
millions
Purchase of Property and
Equipment
-200 cash outflow
Net cashflow from investments
activities
-200
C. Financing
Figures in
millions
Issue of bonds 75 Cash Inflow
Issue of common stock 50 Cash Inflow
Payment of Dividend -5 cash outflow
Net cashflow from financial
activities
120
Total net cash flow from business = -35 (45-200+120)
Cash at the beginning of the year = 80
Cash at the end of year = 45
Retained earnings (31.12.2012) 217
Add:2013 net income 110
Less: Cash dividends 5
Retained earnings (31.12.2013) 322
WORKING
A. Operating
Figures in
millions
Net Profit Before Tax 185
Depreciation 35
Non-Cash
Expense
Increase in Account receivable -40 Cash Outflow
Increase Inventories -35 Cash Outflow
Decrease in Account payable -15 Cash Outflow
Decrease in tax payable -95 Cash Outflow
Decrease in prepaid insurance 10 Cash Inflow
Net cashflow from operating
activities
45
6. 2. DIRECT METHOD
Net Cashflow from Operating Figures in millions
Cash sales 710
Cash outflows
Cash Purchases 500
Operating expenses 70
Tax paid in cash 95
665
Net Cash Provided by Operating
Activities 45
Net cashflow from investments Figures in millions
Purchase of Property and Equipment
-200
cash
outflow
Net Cash Provided by Investing
Activities -200
Cashflow from financial activities Figures in millions
Issue of bonds 75
Cash
Inflow
Issue of common stock 50
Cash
Inflow
Payment of Dividend -5
cash
outflow
Net Cash Provided by Financial
Activities 120
Total net cash flow from business = -35 (45-200+120)
Cash at the beginning of the year = 80
Cash at the end of year = 45
7. Cash Received from Customers
Sales 750
Add: Opening Accounts Receivables 115
Less: Closing Receivables -155
Cash Collected 710
Determining Purchases
Cost of sales 450
Less: Opening stock -190
Add: Closing stock 225
Purchases 485
Determining cash purchases
Opening accounts payable 135
Purchases 485
Closing accounts payable -120
500
Determining tax paid in cash
opening tax 175
Tax expense 75
Less closing tax -155
Tax Paid 95
Determining dividend paid in cash
Retained earnings (31.12.2012) 217
Add:2013 net income 110
Less: Cash dividends -5
Retained earnings (31.12.2013) 322
Cash Paid for Operating Expenses
Insurance Expense for the period 80
Less: Opening Insurance Prepaid -32
Add: Closing Insurance Prepaid 22
Cash Paid for Insurance 70
Working
8. Q) The CEO of the company wants to know why the cash balance decreased during a profitable year.
You have to explain to CEO about the reasons.
Ans: The cash balance decreased during a profitable year by 45 million this is because the net
cashflow from investment activities is more then the sum of operational and financing activities.
Company invested more amount in property and equipment, inventories and pay more tax. But the
income of the company only can be generated from bonds and common stocks.
The CEO of the company will get more clarity when he/she see the interpretation part of this cashflow
analysis.
9. Interpretation
1) Why has the cash flow increased or decreased?
Net Cash Flow has decreased or increased due to:
1. Account receivable increased by 40
2. Inventory increased by 35
3. Prepaid insurance decreased by 10
4. Property equipment increased by 200
5. Accumulated depreciation decreased by -315
6. Account payable decreased by 15
7. Income tax payable decreased by 20
8. Bonds payable increased by 75
So, cash flow will decreased.
10. 2) Why has the cash flow decreased while Net profit has increased or why has the cash flow increased while
Net profit has decreased?
The cash flow decreased while Net profit has increased because Less Profit has been realized in cash
rather than accruals.
Net cash flow from operation < net profit +depreciation i.e., 45 million<145 million.
The cash flow could further increase by reducing income tax payable, inventories, and account receivable.
3) How did the company finance its investment?
Company finance was raised by issuing of bond, common stock and cash from operational activities.
CONT.……
11. CONT.……
4) What were the sources of cash and where was the utilization of cash?
Sources of cash Amount
(in millions)
Utilization of cash Amount
(in millions)
Issue of bonds 75 Income tax payable 95
Issue of common stock 50 Inventories 35
Cash from operational activities 45 Account receivable 40
Purchase of Property and Equipment 200
12. 5) Does the company enjoy certain degree of financial flexibility and why?
Yes, the company enjoy certain degree of financial flexibility to meet it need for future cash. Current ratio is
only 1.62 (447/275) which means company have enough liquid assets to cover its short-term liabilities.
Quick ratio is 0.80 (447-225/275) which is less than 1, means company not able to fully pay off its current
liabilities in short term.
Debt equity ratio is 0.79 (675/847) and it seem to be good so it can get further debts in future.
Dividend payout ratio is 4.5 % (5/110*100) which is very low.
CONT.……
Current Ratio=Current Assets/ Current Liabilities
Acid test or Quick ratio = currnt asset – inventroies / current
liablities
13. 6) what inference can we draw about a company’s ability to generate future cash flows, to repay its borrowings
and to pay dividends?
No, due to decrease in cash in hand. It needs to monitor the cash flow regularly. However, it can increase flexibility
by selling its investment.
It can raise debt because its,
i) Debt to equity ratio is 0.79 (675/847) it seems to be good so it can get further debts in future.
ii) Debt to asset ratio is 0.43 (675/1552) which is less than 1, means the company owns more assets than
liabilities and can meet its obligations by selling its assets if needed. The lower the debt to assets ratio, the
less risky the company
CONT.……
