Constructing And Analyzing Cash Flow Statements

Constructing and Analyzing Statement of Cash Flows

This assignment involves constructing and analyzing the statement of cash flows for Crosby Corporation based on provided financial statements and other relevant data. The task includes preparing a statement of cash flows using the general procedures, describing the relationship between net income and net cash flows from operating activities, and evaluating whether the buildup in plant and equipment has been financed satisfactorily.

Paper For Above instruction

Introduction

The statement of cash flows is a vital financial statement that provides insight into a company's liquidity, solvency, and financial flexibility. It shows how changes in the balance sheet and income statement affect cash and cash equivalents, helping stakeholders assess the company's ability to generate cash, meet obligations, and fund growth. This paper constructs a statement of cash flows for Crosby Corporation using provided financial data, explores the relationship between net income and cash flows, and evaluates the financing of the company's investment in plant and equipment.

Constructing the Statement of Cash Flows

To systematically prepare the statement of cash flows for Crosby Corporation, the indirect method is utilized. This approach starts with net income and adjusts for non-cash transactions, changes in working capital, and investing and financing activities. The process involves analyzing the comparative balance sheets and income statement data to determine cash inflows and outflows in operating, investing, and financing activities.

Cash Flows from Operating Activities

Net income for 20X2 is $160,000. Adjustments include adding back depreciation expense of $150,000 and considering changes in current assets and liabilities. An increase in accounts receivable from $300,000 to $350,000 indicates a cash outflow, whereas an increase in accounts payable from $250,000 to $440,000 indicates a cash inflow. Prepaid expenses decreased by $50,000, which is a cash inflow, and accrued expenses are adjusted accordingly. Summing these adjustments provides the net cash flows from operating activities.

Calculations:

  • Net income: $160,000
  • Add: Depreciation: $150,000
  • Subtract: Increase in accounts receivable: ($50,000)
  • Add: Decrease in prepaid expenses (assuming a correction, as data suggests $50,000 was paid): $50,000
  • Add: Increase in accounts payable: $190,000 ($440,000 - $250,000)
  • Adjust for accrued expenses: Assuming a decrease by $70,000 to balance liabilities

Overall, the net cash provided by operating activities is approximately $330,000, reflecting the company's operational cash generation capacity.

Cash Flows from Investing Activities

Investing activities primarily involve the purchase and sale of long-term assets. The increase in long-term securities from $80,000 to the next year's figure indicates net investment activity. The plant and equipment increased from $400,000 to $1,000,000, suggesting significant capital expenditure, which results in cash outflows.

Calculations:

  • Increase in investments: Negative cash flow of approximately $30,000.
  • Purchases of plant and equipment: Outflow of roughly $600,000, considering the increase from $400,000 to $1,000,000.

Net cash flows from investing activities are thus estimated to be around -$630,000, indicating substantial investment in assets.

Cash Flows from Financing Activities

Financing activities include issuance or repayment of debt, issuance of stock, and payment of dividends. The issuance of bonds payable indicates inflow, whereas dividends paid ($10,000) reduce cash. Changes in stockholders’ equity components are considered, with no new stock issuance reported.

Calculations:

  • Bonds payable: Inflow of $100,000 (assuming an increase in bonds)
  • Dividends paid: Outflow of $10,000
  • Net cash flow from financing activities: Approximate inflow of $90,000 after considering all financing changes.

Overall, the net cash flow from financing activities results in a net inflow, signifying external financing to support asset growth.

Relationship Between Net Income and Net Cash Flows from Operating Activities

Net income does not always equate to cash flows from operating activities. While net income is derived from accrual accounting, cash flows are concerned with actual cash transactions. Adjustments for depreciation, changes in working capital, and other non-cash expenses or incomes are necessary. For Crosby Corporation, the close alignment between net income ($160,000) and cash flows from operating activities (approximately $330,000) underscores the importance of non-cash adjustments and changes in working capital for cash flow analysis.

This relationship highlights that positive net income can coexist with cash shortages and vice versa. Effective cash flow management requires understanding these differences and operating strategies accordingly.

Assessment of Plant and Equipment Financing

The significant increase in plant and equipment signifies aggressive investment, likely financed through a combination of operating cash flows, debt, or equity. The net cash inflow from financing activities, estimated at around $90,000, suggests external financing partially supports the asset buildup. The company’s ability to generate substantial cash flow from operations, about $330,000, indicates satisfactory internal financing capacity.

However, the reliance on external debt or new financing to fund assets must be monitored carefully. Long-term sustainability depends on consistent positive cash flows, manageable debt levels, and effective capital expenditure strategies. Overall, Crosby Corporation appears to be financing its asset growth in a manner that aligns with its operational cash flow generation, although the magnitude of investments warrants ongoing financial vigilance.

Conclusion

Constructing the statement of cash flows for Crosby Corporation reveals comprehensive insights into its cash management strategies. The firm demonstrates strong operational cash flows, a significant investment outlay, and adequate external financing. Understanding the interplay between net income and cash flows enables better financial decision-making. Effective financing of plant and equipment investments depends on maintaining healthy operational cash flows and prudent leverage management, which Crosby appears to manage well in the current period.

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