Bennett Alexander has invented a glow light using a series of chemicals into a contraption he calls Chemalites. He starts up his business by getting $500,000 from investors and he tries to put his invention on the market. But by the end of 2003, with operations in full swing for a good six months, Chemalite, Inc. is seeing its cash balance drop tremendously, which Alexander and his investors view as a negative. Even though they thought their business was doing well, the numbers they are reading indicate otherwise. We have to determine how these numbers reflect the true nature of the company. Issues
1.Should they continue with business in 2004 and beyond?
2.Do they have a positive cash flow?
3.Are they profitable?
I do believe that Chemalite, Inc. should continue on because they were both profitable and had a positive cash flow. And there are all three answers to the issues in one sentence. Plus, the prototype value will soon increase and the Olympic Games Athens 2004 just placed a huge order with the company, which will both bring in a big profit and help promote the product. The future is looking bright for this company, at least in the short run. Alexander and the investors have to examine the true nature of the company and not simply its increase or decrease in cash from year to year.
Chemalite, Inc. is true profitable. Even with the balance being $230,000 at the end of June 2003, this is a positive cash flow due to all of the investment activities the company has put in; refer to Sample III. Things are looking way up for this young company. Their income statement at the end of 2003, Sample VI, shows a 28% gross profit and a 5.2% increase in net income. This proves the stability and profitability of the company. You can even compare their balance sheets from the end of June 2003 to the one given at the end of the year (Sample II and VII). At the end of June they had $492,500 in assets and liabilities/equity, but at the end of the year in December they had increased their assets and equity to $539,375. The decrease in cash outflow is a good thing because you want to be investing into your company. Please see Samples III and VIII. Their cash balance decreased from $230,000 to $113,000. The negative cash flow from operations is because of inventory buildup and research and development, neither of which are recurring. Positive income is a very good sign and they should be optimistic for their sales growth in the future; especially with the big order from the Olympic Games coming in. And they will most likely raise the price of the prototypes to gain more revenue. I think Chemalite, Inc. should continue doing business for sure. All of my statements below illustrate their positive cash flow and useful investing. They are profitable and will soon do even better, I believe.
I. Summary of cash transactions for the first six months:
1/2/03 Patent 125,000 Cash 375,000 Common Stock 500,000 1/15/03 Organization Costs/Expenses 7,500 Cash 7,500 6/15/03 Machinery 62,500 Cash 62,500 6/24/03 Raw Materials/Inventory 75,000 Cash 75,000
II. Balance Sheet through June 30, 2003:
Assets: Liabilities and...