Question

BIG TWO CORPORATION

Statement of Cash Flows

For the year Ended December 31, 2010

(In Millions)

Cash Flows from Operating Activities:

               Net Income                                                                                                                  117.5

               Sources of Cash

                              Depreciation                                                                                                 100.0

                              Accounts Payable                                                                                        40.0

               Uses of Cash

                              Accounts Receivable                                                                                   (60.0)

                              Inventories                                                                                                 (200.0)

               Net cash provided by operating activities                                              (2.5)

Cash Flows from Investing Activities:

               Cash Used for Fixed Assets                                                                                    (230.0)

Cash Flow from Financing Activities:         

                              Notes Payable                                                                                              50.0

                              Bonds Payable                                                                                            174.0

                              Common and Preferred Dividends                                                          (61.5)

               Net Cash Provided by Financing Activities                                              162.5

               Net decrease in cash and marketable securities                                                 (70.0)

               Cash and securities at beginning of the year                                                        80.0

               Cash and securities at end of the year                                                                   10.0

Required:

a. What were the two (2) main sources of cash inflow in the operating (water distribution) activities of Big Two Corporation and how was it utilized?

b. Does the sizeable increase in inventories indicate that the company is gearing up for a market share expansion or is it simply having a hard time selling its goods?

c. What were the likely cash source of Big Two Corporation’s fixed asset acquisition? Is there an indication that there was a proper matching of borrowing maturities and asset life?

d. Based on your assessment of the company’s cash flow statement, was the firm aggressive in financing its working capital requirements?

Based on the limited data in the cash flow statement, is Big Two Corporation highly leveraged? Please explain briefly

Answer 1

a)	The two main sources of inflow in the operating activities section are:
	1) Net income
	2) Depreciation
	It was utilized in investing in current assets, mainly inventories and
	accounts receivables.
b)	It is an increase in inventory from the previous period. To find out
	whether it is a build up of inventory or difficulty in selling, the figure
	for purchases is required.
c)	There is no surplus cash from operating activites. Hence, the cash for
	investing in fixed assets (long term assets) of $230 million has come
	Bonds payable $174 million and Notes payable $50 million.
	To the extent of $174 financed by bonds payable, the maturities of
	the fixed assets and the source of finance are matching.
	However, the amount sourced through notes payable is not a matching
	finance, as the notes payable is short term financing.
d)	No, it was not aggressive, as it has used the long term source of net
	income received in cash.
	Yes, the firm is highly leverage as it has substantially borrowed funds
	through issue of bonds.