Tutorial 7 - Problem 7

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 3

Problem 7-4

a. Prepare a statement of cash flows (indirect method) for Year 2


Dax Corporation
Statement of Cash Flows Indirect method)
For the Year Ended December 31, Year 2
($ thousands)
Operating cash flows
Net income [Add. Info 1) $160
Add (deduct) non-cash items:
Amortization [Add. Info 4) 10
Depreciation [Add. Info 3) 95
Inc. in account receivable (310)
[860-550]
Inc. in inventories (145)
[935-790]
Inc. in prepaid expenses (25)
[25-0]
Inc. in accounts payable 30
[630-600]
Inc. in deferred income tax 12
[57-45]
Inc. in other liabilities 7
[85-78]
Net cash from operating activities ($166)

Investing cash flows


Purchase of patents (140)
Purchase of plant and equipment (700)
[2650-1950]
Purchase of other assets (25)
[200-175]
Net cash from investing activities ($865)

Financing cash flows


Addition to long-term debt 800
[1650-850]
Issuance of common stock 200
[2000-1800]
Dividends paid [Add. Info 2] (109)
Net cash from financing activities $891

Net decrease of cash ($140)


Beginning cash and cash equivalent $640
Ending cash and cash equivalent $500
b. Explain the discrepancy between net income and cash flows from operations.

Cash flows from operations concern about cash movement (cash inflows and outflows)
from a business operation while net income is net profit (revenues in excess of expenses)
reported in bottom line of income statement. Cash flows applies cash accounting whereas
net income is accrual adjusted. Net income reflects a business’s financial performance
whereas cash flows from operations tell stakeholders business liquidity and flexibility.
Net income manipulation is slightly easier than cash flow manipulation because cash
transactions can be traced and time stamped while some net income transactions can be
arbitrary.

c. Describe options available to management to remedy the cash deficiency.

Option 1: Borrow from bank, provided the company has good operating history.
Option 2: Tighten collection policy to accelerate cash collection from customers.
Option 3: Issue new stocks to obtain equity financing from shareholders.
Option 4: Reduce unnecessary expenses and monitor expenditure to have cash flexibility.
Option 5: Issue corporate bonds to obtain debt financing from bondholders.

You might also like