Question

2. For each of the following scenarios, determine if it is an indicator of potential cash flow problems:
(Hint: Review Chapter 5 PowerPoint notes on Slide 20 and Textbook on Pages 366-367.)

		Potential future cash flow problems
		Yes/No
a.	Growth in accounts receivable or inventories that is less the growth rate in sales.
b.	Increases in accounts payable that exceed the increase in inventories.
c.	Capital expenditures that substantially exceed cash flow from operations.
d.	Sales of marketable securities are less than purchases of marketable securities.
e.	Other operating current liabilities that grow at a lesser rate than sales.
f.	A reduction or elimination of dividend payments
g.	A substantial shift from long-term borrowing to short-term borrowing.

Answer 1

Determination of an indicator of future cash flow.

a) Growth in Accouts receivable or inventories that is less the growth rate in sales : Yes, it can be future cash flow problem as increase in debtors increase the risk of Bad debts i.e they are not able convert it into cash.

b) Increases in accounts payable that exceed the increase in inventories : Yes, as they are not able to convert the inventories into sale which will lead to problem of cash shortage to pay the creditors even.

c)Capital expenditures that substantially exceed cash flow from operations.: No, it is normal that with the inc. in Cap. ex. will be taken out of cash from operation for this comapany should take loan.

d) Sales of marketable securities are less than purchases of marketable securities: No, it can be a statergy of comapany due to price of marketable securities.

e) Other operating current liabilities that grow at a lesser rate than sales: No, it is good for the cash flow system.

f) A reduction or elimination of dividend payments: Yes, it shows the current cash flow problem which will have impact on the company as there will be lack of int. of investors.

g) A substantial shift from long-term borrowing to short-term borrowing: Yes, it can be a major problem of future cash flow as now they have to pay early unlike in long term borrowing thus have to make to high cash flows.