Chemco Coatings Case Study

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Question 1: Using the given income statement and balance sheet data, I've generated a cash-based income statement for Chem-Co for 2005 below. Chem-Co
Jennifer Haggerty 2005
CASH BASED INCOME STATEMENT $ 1,000,000Cash Flow Impact
Net sales861 SourceRevenue
Change in accounts receivable(113) UseAsset Increase
Cash receipts from sales 748

Cost of goods sold(680) UseExpense
Change in inventory(39) UseAsset Increase
Change in accounts payable17 SourceLiability Increase
Cash purchases (702)

Cash margin 46

Total operating expenses(150)UseExpense
Depreciation & amortization26 SourceNoncash Expense
Change in prepaid expenses3 Source Asset Decrease
Change in accruals7 SourceLiability Increase
Change in other current assets & liab.0
Cash operating expenses (114)

Cash operating profit (68)

Interest on marketable securities6 Source Revenue
Income on long term investments0
All other expenses & income (net)0
Cash before interest & taxes (62)

Interest expense - Bank notes0
Interest expense - Term notes and LTD(18)UseExpense
Income taxes reported(5)UseExpense
Change in income tax payable1 SourceLiability Increase
Change in deferred income taxes0

Cash flow from operations (CFO) (84)

Capital exp. and leasehold improvements(38)Use Asset Increase Change in long-term investments0
Change in intangible assets1 Use Asset Increase
Change in other noncurrent assets0
Cash Used for Investments (37)

Payment for last period's CM Term note0
Payment for last period's CMLTD(9)Use Payment For Financing Dividends paid (DIV)0
Payments for financing (9)

Cash before external financing (130)

Change in short-term bank debt117 Source Liability Increase Change in term notes & EOP CM term notes(1)Use Liability Decrease Change in LT debt + EOP CMLTD0
Change in stock & surplus0
Change in preferred stock0
Change in treasury and other equities0
Change in other noncurrent liabilities0
External financing 116

Extraordinary exp. and cha. In acct. prin.0
Current period accounting adjustment10 UseAsset Decrease

Change in cash & mktbl securities (14)
Actual change in cash (24)

Question 2: Calculations are in the table below.
Days accounts receivable 2004: 56.21 daysDays accounts receivable 2005: 91.14 days Inventory turnover 2004: 40.69 days OR 8.97 timesInventory turnover 2005: 55.82 days OR 6.54 times Days accounts payable 2004: 19.98 daysDays accounts payable 2005: 25.38 days

Determine if the use/source of cash in working capital was a result of sales growth, credit policy, inventory policy, or trade credit policy. Did these turnover ratios improve or deteriorate? What was the resulting impact on cash flow? Based on the numbers in the previous charts, it appears that the use of cash was a result of a mixture of several variables to include sales growth, credit policy (payables and receivables), and inventory policy. The company's sales did increase 30% from 2004 to 2005 which also brought additional uses of cash. We also saw many of their ratios deteriorate during this year, mostly, I assume, due to credit policy. They are allowing their receivables to be paid over a longer term in 2005 than in 2004; this leapt up from 56.21 days in 2004 to 91.14 days in 2005. It is not stated whether they chose to allow this extension or if there are issues with collections on receivables. Possibly the industry is deteriorating. (Additional knowledge of this industry in their geographic region during this time period would be necessary.) Additionally, they are turning over their inventory slower than in 2004 – every...
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