Prepare A Statement Of Cash Flows For The Year Ending Decemb

Prepare a statement of cash flows for the year ending December 31, Year 4 using the indirect method

You are given the following information for Barko Industries: Barko Industries Balance Sheet (Partial) for Year 3 and Year 4, Income Statement for Year 4, and other relevant data. Prepare a statement of cash flows for Year 4 using the indirect method, analyze the company's cash position, and identify additional information provided by the cash flow statement.

Paper For Above instruction

The preparation of a statement of cash flows is a fundamental component of financial statement analysis, offering insights into a company's liquidity, solvency, and operational efficiency. Using the indirect method, this statement adjusts net income for changes in balance sheet items and non-cash transactions. This essay outlines the process of preparing the statement for Barko Industries' Year 4, interprets the resulting cash position, and discusses the unique information it reveals beyond the balance sheet and income statement.

Introduction

The financial statements of a company provide a snapshot of its financial health, but they often do not fully capture the movement of cash within the business. The statement of cash flows bridges this gap by detailing cash inflows and outflows from operating, investing, and financing activities. For Barko Industries, the task involves preparing this statement for Year 4 based on the given partial balance sheet, income statement, and supplementary data.

Preparation of the Statement of Cash Flows

Using the indirect method, the starting point is the net income, which in Barko Industries' case for Year 4 is $56,400. Adjustments are then made for non-cash expenses and changes in working capital.

Operating Activities:

  • Depreciation Expense: Added back to net income since it is a non-cash charge, amounting to $46,000.
  • Loss on Sale of Asset: The sale recorded a loss of $8,700; this is added back to net income because it decreases net income without affecting cash flow.
  • Accounts Receivable: A change from Year 3 to Year 4 indicates an increase (from $70,000 to a higher figure assumed), suggesting a use of cash; however, exact figures are not fully provided. Assuming an increase, this reduces cash flow.
  • Inventories and Accounts Payable: Changes in inventories and accounts payable impact cash flow, but due to incomplete data, assumptions may be needed based on typical trends or available information.

Investing Activities:

  • Sale of an asset at a loss provided cash of $220,000, with the original asset cost at $360,000 and a sale loss of $8,700, indicating a cash inflow of $220,000.
  • Capital expenditures and other asset purchases are not explicitly listed; hence, no additional investing cash flows are presumed unless further data is given.

Financing Activities:

  • Dividends paid totaling $22,460 are cash outflows under financing activities.
  • Changes in long-term debt or equity are not specified, limiting complete analysis.

Calculation of Cash Flows

Considering all the adjustments, the cash flows from operating activities can be approximated by starting with net income, adding back depreciation and losses, and adjusting for working capital changes as inferred. The large cash inflow from asset sale significantly increases overall cash, while dividends and possible working capital changes cause outflows.

Analysis of Cash Position

From the available data, at the end of Year 4, Barko Industries' cash balance decreased from $70,000 at the end of Year 3 to $9,640, indicating substantial cash outflows predominantly due to operations, reinvestment, or financing activities. Despite profitability (net income of $56,400), the declining cash balances suggest challenges in cash management or high investment outlays. The asset sale brought in cash but did not fully counteract the other cash uses. The company’s ability to generate sufficient operating cash flow to cover dividends, repay debts, and fund investments appears strained, pointing to potential liquidity concerns.

Information Provided by the Cash Flow Statement

The cash flow statement reveals specific details about cash movements that are not evident from the balance sheet or income statement alone. It identifies cash generated from core operations, shows how much was spent on asset purchases or received from asset sales, and details financing activities like dividend payments or debt issuance. These distinctions clarify whether income is translating into cash, which is vital for assessing the firm's ability to sustain operations and meet obligations. For instance, profit does not necessarily equate to positive cash flow, highlighting the importance of the cash flow statement in financial analysis.

Conclusion

Preparing the statement of cash flows for Barko Industries helps elucidate the company's liquidity position and operational efficiency. Despite a profitable year, the significant cash decrease underscores the importance of examining cash flow sources and uses explicitly. Additionally, the statement provides critical insights into cash inflows and outflows associated with asset sales, dividends, and working capital changes that are not apparent from the other financial statements alone. This comprehensive view aids managers, investors, and creditors in making informed decisions about the company's financial health and strategic planning.

References

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