Question

You have just been hired as a financial analyst for Barrington Industries. Unfortunately, company headquarters (where all of the firm's records are kept) has been destroyed by fire. So, your first job will be to recreate the firm's cash flow statement for the year just ended. The firm had $100,000 in the bank at the end of the prior year, and its working capital accounts except cash remained constant during the year. It earned $5 million in net income during the year but paid $750,000 in dividends to common shareholders. Throughout the year, the firm purchased $5.5 million of machinery that was needed for a new project. You have just spoken to the firm's accountants and learned that annual depreciation expense for the year is $440,000; however, the purchase price for the machinery represents additions to property, plant, and equipment before depreciation. Finally, you have determined that the only financing done by the firm was to issue long-term debt of $1 million at a 6% interest rate. What was the firm's end-of-year cash balance? Recreate the firm's cash flow statement to arrive at your answer. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar, if necessary.

Answer 1

First identify the activities:

Cash dividend paid - Financing (decrease)

Purchase of machinery - investing (decrease)

Issuance of long term debt - financing (increase)

Now recreate the statement of cash flow:

Barrington Industries
Statement of Cash Flows
Cash flow from Operating Activities
Net Income	5000000
Add: Non-cash operating expenses	440000
Net cash provided by operating activities		5440000
Cash flow from Investing Activities
Purchase of Machinery	-5500000
Net cash used by investing activities		-5500000
Cash flow from Financing Activities
Payment of cash dividends	-750000
Issuance of long term debt	1000000
Net cash provided by financing activities		250000
Net increase in cash		190000
Cash balance, beginning of year		100000
Cash Balance, end of the year (190000 + 100000)		290000