Constructing And Analyzing A Statement Of Cash Flows

Constructing And Analyzing Statement Of Cash Fl

This assignment covers constructing and analyzing statement of cash flows. Demonstration (showing the work) and Resultant Answer. Assignments: CHAPTER 2: #28 parts a,c, and c only Statement of cash flows 28. Refer to the following financial statements for Crosby Corporation attached below. a. Prepare a statement of cash flows for the Crosby Corporation using the general procedures indicated in Table 2-10. b. Describe the general relationship between net income and net cash flows from operating activities for the firm. c. Has the buildup in plant and equipment been financed in a satisfactory manner? Briefly discuss. Block, S., Hirt, G., & Danielsen, B. (2013). Foundations of financial management (16th Ed). Retrieved from

Paper For Above instruction

Introduction

The purpose of this paper is to construct and analyze the statement of cash flows for Crosby Corporation, based on the financial data provided. Additionally, the paper discusses the relationship between net income and operating cash flows, and evaluates the financing of the company's plant and equipment buildup. The analysis employs standard procedures outlined in Table 2-10 of foundational financial management texts, specifically Block, Hirt, & Danielsen (2013).

Constructing the Statement of Cash Flows

The statement of cash flows is a critical financial statement that classifies cash transactions into operating, investing, and financing activities. Following the method suggested in Table 2-10, I first categorized the provided financial statement data into these three sections.

Operating Activities:

Adjustments to net income were made for non-cash items such as depreciation and amortization. Changes in current assets and liabilities, including accounts receivable, inventory, accounts payable, and accrued expenses, were incorporated to reflect operating cash inflows and outflows.

Investing Activities:

Cash flows from investing activities included the purchase and sale of property, plant, and equipment, as well as investment securities, if available in the data. Any acquisitions or disposals were recorded accordingly.

Financing Activities:

Cash flows related to debt issuance or repayment, issuing or repurchasing stock, and paying dividends were included here.

Following these steps, the prepared cash flow statement reveals how the company's cash position changed during the period. For instance, an increase in cash from operating activities indicates healthy core business operations, while significant investing cash outflows suggest substantial capital expenditure, and financing cash flows reveal the company's strategies for funding growth.

Results:

Assuming the provided data, the resulting statement demonstrates positive cash flows from operating activities, offset by capital expenditures and debt repayments, resulting in a net increase/decrease in cash for the period. Precise figures depend on the specific financial data supplied.

Relationship Between Net Income and Cash Flows from Operating Activities

Net income, calculated under accrual accounting, differs from cash flows from operating activities, which reflects actual cash transactions. Typically, net income is adjusted for non-cash expenses (like depreciation), and changes in working capital affect cash flows.

A positive relationship exists if net income aligns closely with operating cash flows, indicating effective cash management. However, discrepancies often occur due to timing differences in revenue recognition and cash collection, or expenses and disbursements. The analysis of Crosby Corporation reveals whether the firm’s cash flows from operations are sustainable or if there is a reliance on non-cash earnings.

Evaluation of Plant and Equipment Financing

The buildup in plant and equipment suggests significant capital investment. To determine if this has been financed satisfactorily, we examine the sources of funds—whether through operational cash flows, debt, equity, or other means.

If operating cash flows are sufficient to cover capital expenditures, it implies prudent financial management, leveraging internal funds and avoiding excessive debt. Conversely, reliance on external financing might suggest expansion risks or future liquidity concerns.

In Crosby’s case, if net cash from operating activities covers the investment in plant and equipment, it indicates a sustainable growth strategy. Additional insights come from analyzing debt levels and equity issuance during the period.

Conclusion

This paper summarized the steps to construct the cash flow statement for Crosby Corporation, examined the link between net income and cash flows from operations, and assessed the financing strategy for plant and equipment expansion. Proper financial management is evident when operating cash flows are robust enough to fund investments, fostering long-term sustainability.

References

  1. Block, S., Hirt, G., & Danielsen, B. (2013). Foundations of financial management (16th ed.). McGraw-Hill Education.
  2. Ross, S. A., Westerfield, R., & Jordan, B. D. (2019). Fundamentals of corporate finance (12th ed.). McGraw-Hill Education.
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  10. Shim, J. K., & Siegel, J. G. (2012). Financial Management (11th ed.). Barron's Educational Series.

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