Cash Flow Data Mt 480 Projectrc 5 15 Mt 480 Unit 3 Case Stud

Cash Flow Data Mt 480 Projectrc 5 15mt 480 Unit 3 Case Study Smith Lo

Analyze the financial data, specifically the comparative balance sheets and cash flow statement, to explain changes in cash flow from one year to the next. Focus on six highlighted accounts: cash and marketable securities, accounts receivable, inventory, other current assets, plant property and equipment, and long-term debt. Explain whether each account's change positively or negatively impacted cash flow, the underlying accounting or business concepts involved (such as 2/10 net 30 payment terms, Economic Order Quantity, UCC1 filings, collateral, and MACRS depreciation), and how these changes influenced the company's cash position. Additionally, assess the company's overall cash flow management in light of its net income, depreciation expenses, dividends paid, and the company's goal to increase cash from $16,566 in 2016 to $70,000 in 2017. Summarize the key financial trends and suggest strategic actions to improve cash flow in future periods.

Sample Paper For Above instruction

The analysis of the company's financial statements reveals crucial insights into the cash flow dynamics between 2016 and 2017. Several accounts played significant roles in shaping the cash position, with some acting as sources of cash while others represented uses or investments. Understanding these movement patterns is essential for evaluating the company's liquidity and operational efficiency, as well as for formulating strategic recommendations for future improvements.

Changes in Assets and Their Impact on Cash Flow

The company's cash and marketable securities decreased from $33,411 in 2016 to $16,566 in 2017, indicating a net reduction of $16,845. Although this appears unfavorable, a deeper analysis shows that the reduction was primarily due to the collection of accounts receivable, which decreased by $58,563 from $318,768 to $260,205. Collecting accounts receivable early, in accordance with their 2/10 net 30 terms, indicates effective receivables management, translating to a source of cash that improves liquidity.

The accounts receivable decrease signifies successful collection efforts, generating cash inflows. Conversely, inventory holdings increased by $71,079, from $352,740 to $423,819. This build-up in inventory could temporarily tie up cash, especially if driven by overstocking or anticipation of increased demand. The concept of Economic Order Quantity (EOQ) becomes relevant here; EOQ aims to minimize ordering and holding costs, ensuring optimal inventory levels without unnecessary cash expenditure. Overstocking beyond EOQ can lead to excess cash being tied in inventory, thus reducing liquidity.

Other current assets fell by $11,339, from $29,912 to $41,251, with the reduction possibly attributable to efficient asset management or conversion of current assets into cash. Plant property and equipment increased by $109,455, from $1,403,220 to $1,512,675, implying new purchases or upgrades planned to support operational capacity. Assets like PP&E are depreciated over time with MACRS (Modified Accelerated Cost Recovery System), which accelerates depreciation deductions, reducing taxable income and impacting cash flows positively through tax savings.

On the liabilities side, accounts payable increased by $46,232, from $332,004 to $378,236. Extending payables, especially in conjunction with filing mechanics liens when needed, allows the company to retain cash longer. A mechanics lien provides a legal claim against property for unpaid work or supplies, ensuring the company can secure payment and possibly influence accounts payable or receivable timing.

Wages payable increased significantly by $6,625, from $7,862 to $14,487, representing accrued expenses. Accrual accounting recognizes expenses when incurred, not when paid, so increased wages payable reflect expected future cash outflows, but do not immediately impact cash flow.

Long-term debt decreased by $113,534, from $793,515 to $679,981, indicating loan repayment activities. The loan was likely secured with collateral, and UCC1 filings (Uniform Commercial Code) serve to publicize the lender’s security interest in the company's assets. Paying down debt reduces cash but can improve creditworthiness and reduce interest expenses over time.

Impact of Cash Flow Components and Company Performance

The company's net income of over $3.15 million and depreciation expenses of $212,366 contributed positively to cash flow, emphasizing the role of non-cash charges and profitability. Dividends paid amounting to nearly $3 million further reduced cash holdings, although dividends are discretionary and can be adjusted based on liquidity needs.

Despite a strong net income and efforts to manage receivables and payables efficiently, the cash increase from $16,566 to only $33,411 in 2017 fell short of the $70,000 target set by XYZ Bank. This shortfall could be due to the sustained levels of inventory buildup, substantial dividends paid, and significant financing activities, including debt repayment.

Strategic Recommendations

To improve future cash flows, the company should focus on optimizing inventory management using EOQ principles to prevent excessive inventory levels that tie up cash. Tightening receivables collections through more aggressive follow-up or offering early payment discounts can enhance liquidity further. Adjustments to dividend policies or financing strategies might also be necessary to maintain desired cash levels. Strengthening asset management by evaluating PP&E investments and leveraging tax benefits from MACRS depredation can free up cash. Additionally, careful consideration of debt management strategies—balancing repayments with growth investments—can support sustained liquidity improvements.

In conclusion, the company's cash flow improvements hinge on better inventory control, receivables collection, debt management, and strategic planning around capital expenditures. Implementing these measures will help achieve the targeted cash balance of $70,000 and position the company for future growth and creditworthiness.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
  • Gibson, C. H. (2018). Financial Reporting & Analysis. Barron's Educational Series.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance. McGraw-Hill Education.
  • Online Accounting Tutorials. (2020). Explanation of MACRS Depreciation. Investopedia. https://www.investopedia.com/terms/m/macrs.asp
  • UCC Filing and Collateral. (2021). UCC1 Financing Statements. UCC Central. https://ucccentral.com/articles/what-is-ucc1
  • Economic Order Quantity (EOQ). (2019). Inventory Management Strategies. APICS. https://www.apics.org/apics-for-business/definition-dictionary/economic-order-quantity-eoq
  • Mechanics Lien. (2020). Construction Law Resource Center. FindLaw. https://construction.findlaw.com/construction-contracts/mechanics-lien.html
  • 2/10 net 30 Payment Terms Explained. (2018). Accounts Receivable Management. QuickBooks Resource Center. https://quickbooks.intuit.com/r/accounts-receivable/2-10-net-30-terms
  • Financial Statement Analysis. (2017). Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/finance/financial-statement-analysis/
  • Loan Amortization and Debt Management. (2022). Investopedia. https://www.investopedia.com/terms/l/loan-amortization.asp

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