Chemlite B Financial Accounting

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Cash Flow Analysis

1991 1992
Mangesh Pansare, Rajesh Chavan, Shekhar Tewari, Vinay Thakker, Ranjan Prakash, Prajay Kumar Group 2

Executive Summary
Bennett Alexander founded Chemalite, Inc. in the late 1990. The first year of operations has been very successful. In a meeting held in January 1992, the shareholders of the company approved moving the production facility to a larger location to support expanding sales. The shareholder meeting ended with a decision to meet during late March to review the performance of the company and study the projected financial statements for 1992. To prepare for the meeting, when Alexander decided to review the expected financial statements for the year ending December 31, 1992 he observed that the net income was very attractive – increasing by over 400%. However, he realised the amount of short term debt reflecting in the balance sheet was a big concern. He wanted to understand this as he knew the shareholders would have questions. Problem statement

Listed below are the key problem areas identified by us:
* Short term funds are being used to acquire long term Assets. * Short term debt of $2,00,000 is being used to acquire Land. * Short term debt i.e. Notes payable of $4,25,000 @ 10% is being used to acquire New production facility with expected life of 10 years (long term asset) * In the short term the Company will face liquidity problem as the Cash generation form operation is only $10,740 which will not be sufficient to pay dividend of $12,000 Alternatives to address the problem

* Reducing Inventory
* The Purchase of Raw Material on Credit period of 30 days will improve cash inflow and save Cash outflow by $45,000 * Use of Long term Debt for financing the Long term Assets considering the tax advantages * Defer the purchase of new production facility

* Option of taking the new facility on Lease
* Evaluating New Machinery vs. Existing Machinery considering...
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