Question

4) Write a brief summary about the financial performance of the following company by analyzing its cash flow statement: Market Company Statement of Cash Flows For the Year Ended Dec. 31, 2018 Operating Activities Net Income $4,000 Depreciation Expense 400 Increase in Accounts Receivable (500) Increase in Accounts Payable 200 Cash Flow from Operations $4,100 Investing Activities Cash Flow from Investing Activities $0 Financing Activities Increase in Common Stock $1,000 Increase in Paid-in-Capital 1,000 Dividends Paid (2,000) Cash Flow from Financing Activities $0 Change in Cash $4,100 Beginning Cash Balance 100 Ending Cash Balance $4,200

Answer 1

The change in cash balance i.e. $4100 is contributed through operating activities. The company has not made any changes in its plant assets and investments for the current year which is why the cash flow from investing activities is $0. The cash flow from financing activities is also $0 meaning the company raised $2000 through issuance of stock and paid $2000 in dividends thereby negating the effect. In operating activities , the net income is the major contributor for the cash flow with the depreciation expense being a non cash activity. Also, the change in cash i.e. $100 is very minimal compared to the beginning cash balance of the firm which does not show a healthy financial position. This could possibly be due to the fact that the firm has not made any investments in the current year which in turn did not increase its revenues and profits. Also, the accounts receivable out flow is greater than its accounts payable which means that the firm is lagging behind in cash collections and has a relaxed cash policy. Also the dividend payment is quite high at 50% , when in fact the company must plough back more profits and make profitable investments.