Statement of Cash Flows

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Exhibit 1: Alpha Corporation

I. For each of the years on the Statement of Cash Flows:

1. What were the firm’s major sources of cash?
Sources of cash: Sales of depreciable assets and sales of discontinued operations in 1990 and increasingly from operating activities, especially related to restructuring and other unusual items.

2. What were the firm’s major uses of cash?
Cash comes mainly from payment of debt and investments in depreciable assets.

3. Was cash flow from operations greater than or less than net income? Explain in detail the major reasons for the difference between these two figures. The net income was negative from 1989 to 1991. The net income is negative due to the depreciation costs. Operating cash flows have been positive and have increased every single year. The firm has started generating positive operating cash flows and has repaid a considerable amount of debt.

4. Was the firm able to generate enough cash from operations to pay for all of its capital expenditures? No. In 1991 the capital investments were $157M, whereas the operating cash flows amount only to $125M.

5. Did the cash flow from operations cover both the capital expenditures and the firm’s dividend payments, if any? No. See question 3. The company has been decreasing the amount paid in dividends down to 0 in 1991.

6. If it did, how did the firm invest its excess cash?
N/A

7. If not, what were the sources of cash the firm used to pay for the capital expenditures and/or dividends? The main sources of cash have changed through the years. In 1989 the issuance of debt was the main source ($305M). In 1990, though, the major sources of cash were the sale of discontinued operations ($407M) and restructuring ($384M) as well as the sales of depreciable assets ($242M). In 1991, the main sources of cash were the reduction in A/R ($160M), sales of depreciable assets ($157M) and restructuring ($135M).

8. Were the working capital (current asset and current liability) accounts other than cash and cash equivalents primarily sources of cash, or users of cash? They were mainly producers of cash. A/R and inventory have been reducing; thus providing more cash, at a higher pace than the reduction in A/Ps, which used some cash.

9. What other major items affected cash flows?
It’s worth highlighting the unusual source of cash that came in 1989 from the proceeds of discontinued operations. It should be noted that the company used that cash to pay off long term debt. Every year the company has been increasing cash through restructuring and sales of assets. II. What was the trend in:

10. Net income?
The company generated losses every year, especially negative was the second year.

11. Cash flow from (continuing) operations?
Cash from operations has been increasing consistently.

12. Capital expenditures?
Capital expenditures have been decreasing consistently.

13. Dividends?
Dividends have decreased down to 0 in the most recent year.

14. Net borrowing (proceeds less payments of short- and long-term debt)? Net borrowings were positive in 1989 (($355M), and negative thereafter: ($600M) in 1990 and ($88M) in 1991.

15. Working capital accounts?
Working capital accounts in general have increase in the 3-year period, with some ups and downs on the second year.

III. Based on the evidence in the Statement of Cash Flows alone, what is your assessment of the financial strength of this business? Why?

Alpha Corporation’ cash flow statement shows mixed signals on regards to its financial strength. On the one hand working capital accounts have been increasing. On the other hand, the company is producing major source of cash by selling assets and restructuring the company. In 1990, the company proceeds from discontinued operations and restructuring are 10 times higher than A/R. Most of those proceeds were used to pay long term debt. One reason...
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