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?

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

Answer 1

(a).

Followings were the main two sources of cash flows in operating activities;

1. Depreciation

2. Accounts payable (Purchase on account from suppliers)

Cash flows in operating activities were utilized as follow;

1. Accounts receivable (Goods sold on account to customers)

2. Inventories (Cash blocked in the manufactured but not sold goods)

(b).

Sizeable increase in inventories indicate that the company having a hard time selling its goods because manufactured goods is lying with the company unsold which shows that company have hard time in selling its goods.

(c).

Likely cash source of Big Two Corporation’s fixed asset acquisition are as follow;

·        Bonds payable

·        Notes payable

There was not a proper matching of borrowing maturities and asset life because required investment in fixed assets is much higher than cash raised from bonds payable and notes payable that is why company is using beginning cash balance (short-term funds) for financing fixed assets.

(d).

Yes, on the basis of cash flow statement it is clear that the firm aggressive in financing its working capital requirements because in case of aggressive policy a firm makes less investment in current assets while use maximum of short-term financing. Hence it looks that firm is using aggressive policy.

(e).

Yes, Big Two Corporation highly leveraged because when we see financing section of the cash flows then we will find that firm have major portion of debts funds in compare to equity funds.

Hence it shows that firm is highly leveraged.