Get instant access to this case solution for only $15

Statement of Cash Flows Case Solution

Solution Id Length Case Author Case Publisher
940 2850 Words (11 Pages) Fernando Penalva Marc Badia Castella Harvard Business School : IES530
This solution includes: A Word File A Word File

For Alpha Corporation, cash flow from operations was positive (for all the three years) whereas net profit was negative (for all the three years); hence cash flow from operations was greater than net profit for all the three years under consideration.

For Beta Corporation, cash flow from operation was greater than net income in 1989 and 1900, whereas cash flow from operation was less than net income in 1991.

For Gamma Corporation, cash flow from operation was greater than net profit for all the three years under consideration.

Case Analysis for Statement of Cash Flows

Cash flow from operations shows cash inflows and outflows related to the fundamental operations of the basic line or lines of business that the company is in and it includes cash receipts from the sale of goods and services and the cash outflows for purchasing inventory, and paying wages, taxes and rent. Profit, also called net income, is what remains from sales revenue after all the firm's expenses are subtracted. Cash flow from operations is a better measure of a business's profits than net profits because a company can show positive net profits (on the income statement) and still not be able to pay its debts. It's cash flow that pays the bills.

Cash flow from operations is calculated by adjusting net income for all non-cash revenues and expenses like depreciation and amortization, and adjusting net income for changes in working capital. Under the accrual basis of accounting, net income is not the same as net cash provided by operating activities. Revenue is recorded when earned and expenses are recorded when incurred.  Earned revenues may include credit sales for which the company has not yet collected cash. Therefore, under the indirect method, companies must adjust net income to convert certain items to the cash basis. The indirect method starts with net income and converts it to net cash provided by operating activities, by applying three types of adjustments, (a) Add back (to net income) noncash expenses, such as depreciation expense, amortization, or depletion; (b) Deduct gains and add losses that resulted from investing and financing activities. If a gain on the sale occurs, the company deducts the gain from its net income. If a loss on the sale occurs, the company adds the loss to its net income; (c) Analyze changes to noncash current asset and current liability accounts. Deduct from net income increases in current asset accounts, and add to net income decreases in current asset accounts to arrive at net cash provided by operating activities. 

3. Alpha Corporation did not generate enough cash from operating activities to be able to pay all of its capital expenditure in all the three years under consideration.

Beta Corporation generated enough cash from operating activities to be able to pay all of its capital expenditure in 1989 and 1990 but it did not generate enough cash from operating activities to be able to pay all of its capital expenditure in 1991.

Gamma Corporation generated enough cash from operating activities to be able to pay all of its capital expenditure in all the three years under consideration.

4. Alpha Corporation did not generate enough cash from operating activities to be able to pay all of its capital expenditure and dividend payments in all the three years under consideration.

Beta Corporation did not pay any dividends in all the three years under consideration. Beta Corporation generated enough cash from operating activities to be able to pay all of its capital expenditure in 1989 and 1990 but it did not generate enough cash from operating activities to be able to pay all of its capital expenditure in 1991.

Gamma Corporation did not pay any dividends in all the three years under consideration. Gamma Corporation generated enough cash from operating activities to be able to pay all of its capital expenditure in all the three years under consideration.

5. Alpha Corporation did not generate enough cash from operating activities to be able to pay all of its capital expenditure and dividend payments in all the three years under consideration.

Beta Corporation generated enough cash from operating activities to be able to pay all of its capital expenditure in 1990. It used its excess cash to make payments under working capital line of credit, payments under equipment line of credit and payments under capital lease obligations. In 1989, cash from operating activities was just enough to be able to pay all of its capital expenditure. It did not have any surplus cash after paying for capital expenditure. Hence, it had to borrow debt in order to make payments under working capital line of credit, payments under equipment line of credit and payments under capital lease obligations. It did not generate enough cash from operating activities to be able to pay all of its capital expenditure in 1991. Gamma Corporation used its excess cash after paying for capital expenditure to purchase Kienzle business in 1991. In 1989 and 1990, Gamma Corporation used its excess cash to retire debt and partly for the purchase of treasury shares.

6. Alpha Corporation did not generate enough cash from operating activities to be able to pay all of its capital expenditure and dividend payments in all the three years under consideration. It used its proceeds from long-term debt to pay for its capital expenditure in 1989. For 1990 and 1991, it used the proceeds from disposal of depreciable assets and sale of discontinued operations to pay for its capital expenditure.

Beta Corporation did not pay any dividends in all the three years under consideration and generated enough cash from operating activities to be able to pay all of its capital expenditure in 1989 and 1990. In 1991, Beta Corporation used the proceeds from issuance of common stock to pay all of its capital expenditure.

Gamma Corporation did not pay any dividends in all the three years under consideration and generated enough cash from operating activities to be able to pay all of its capital expenditure in all the three years under consideration.

7.

i. Alpha Corporation

Year

Sources of cash

Users of cash

1989

Accounts payable and other current liabilities

Accounts receivable, Inventory, Other current assets

1990

Accounts receivable, Inventory

Other current assets, Accounts payable and other current liabilities

1991

Accounts receivable, Inventory, Other current assets

Accounts payable and other current liabilities

ii. Beta Corporation

Year

Sources of cash

Users of cash

1989

Inventory, Accounts payable and accrued expenses

Accounts receivables, Deposits and other assets

1990

Deposits and other assets

Accounts receivable, Inventory, Accounts payable and accrued expenses

1991

Accounts payable and accrued expenses

Accounts receivable, Inventory, Deposits and other assets

iii. Gamma Corporation

Year

Sources of cash

Users of cash

1989

Prepaid expenses, Accounts payable

Accounts receivable, Inventory

1990

Inventories, Accounts payable

Accounts receivable, Prepaid expenses

1991

Accounts receivable, Inventory

Prepaid expenses, Accounts payable

Get instant access to this case solution for only $15

Get Instant Access to This Case Solution for Only $15

Standard Price

$25

Save $10 on your purchase

-$10

Amount to Pay

$15

Different Requirements? Order a Custom Solution

Calculate the Price

Approximately ~ 1 page(s)

Total Price

$0

Get More Out of This

Our essay writing services are the best in the world. If you are in search of a professional essay writer, place your order on our website.

Essay Writing Service
whatsapp chat icon

Hi there !

We are here to help. Chat with us on WhatsApp for any queries.

close icon