Question

The comparative financial statements for Halley Company for 2018 and 2019 are presented below.

Other Information:

(a) All Sales to customers are made on credit.

(b) There have been no sales of Building and Equipment during 2019.

Question 2 (continued)

Bill Bailey, the CEO of Halley Company is most concerned. Although he has made a profit of $44,000 in 2019 his cash balance during the year has increased by only $1,000.

Required: [Show all workings where necessary]

(a) Determine the following amounts that relate to Halley’s Cash Flow from Operations for the 2019 financial year:

1. How much cash did Halley receive from its customers in 2019?

2. How much cash was paid to Halley’s suppliers of Inventory during 2019?

3. How much cash did Halley spend on Salaries and wages during 2019?

4. How much cash did Halley spend on Interest payments during 2019?

5. How much cash did Halley pay in Income taxes during 2019?

6. What was the Cash Flow from Operations for the 2019 financial year?

(b) What was the Cash Flow from Investing Activities for the 2019 financial year?

(c) What was the Cash Flow from Financing Activities for the 2019 financial year?

(d) Use your analysis in parts (a) (b) and (c) to explain to Bill how he has generated a profit of $44,000 yet has seen his cash balance only increase by $1,000. Do you think Bill should be concerned about this situation?

Answer 1

(a)

	Cash flow from Operating Activities
	Cash Receipts
1	Cash Collected from customers	$    1,187,000		=1200000+93000-106000
			$    1,187,000
	Cash Payments
2	Cash paid to Suppliers	$      (794,000)		=-(788000+136000-141000+162000-151000)
3	Cash paid for Wages and Salaries	$      (280,000)		=-(280000)
4	Cash paid for Interest	$        (14,000)		=-(12000+10000-8000)
5	Cash paid for Income tax	$        (22,000)		-22000
	Total Cash Outflows		$ (1,110,000)
6	Net Cash from operating activities		$         77,000

(b)

Cash flow from Investing Activities
Purchase of Building and Equipment	$        (55,000)		=790000-845000
Net Cash used in investing activities		$       (55,000)

(c)

Cash flow from Financing Activities
Repayment of Mortgage payable	$        (11,000)		=109000-120000
Dividend Paid	$        (10,000)
Net Cash used in financing activities		$       (21,000)

(d)

Net Profit is calculated as per accrual basis of accounting whereas cash flow statement is prepared as per cash basis. Even though net profit is $44000, cash generated from operations can be different from this due to non cash expenses or due to excess receipt of cash than sales or due to excess payment of cash than expenses recorded and vice versa. Moreover cash is also used in investing and financing activities. In the given problem, cash has been used in Purchasing new building and equipment and also for paying dividends and repaying mortgage.

Despite having income of $44000, only increase in cash of $1000 is not a concern since cash generated in operations has been used for furtherance of business itself by investing in its assets so that it can generate more profits in future. Moreover profits has also been distributed to shareholders which is a good sign of business generating profits.