Question

Following information is extracted from the books of GMN Limited:
a. Current Accounts
 2016: CA = 22,900; CL = 15,300
 2015: CA = 17,600; CL = 12,400
b. Fixed Assets and Depreciation
 2016: NFA = 98,100; 2015: NFA = 75,700
 Depreciation Expense = 2700
c. Long-term Debt and Equity (R.E. not given)
 2016: LTD = 47,000; Common stock & APIC = 1,400
 2015: LTD = 35,850; Common stock & APIC = 1,400
d. Income Statement
 EBIT = 22,000; Taxes = 1400
 Interest Expense = 2,840; Dividends = 2,700
Required:
i. Compute the cash flow from asset for GMN Limited:
ii. Comment on usefulness of cash flow from asset in financial decision making.

Answer 1

Cash flow from Asset (CFFA) = Operating Cash flow - Capital Spending - Additions to NWC (Net Working Capital)

(1) Operating Cashflow = EBIT + depreciation - tax = 22,000 + 2700 - 1400 = 23,300

(2) Capital Spending = Ending NFA - Beginning NFA + depreciation = 98,100 - 75,700 + 2700 = 25,100

(3) Additions to NWC = Ending NWC - Beginning NWC

Ending NWC = Ending CA - Ending CL = 22,900 - 15,300 = 7,600

Beginning NWC = Beginning CA - Beginning CL = 17,600 - 12,400 = 5,200

Additions to NWC = 7,600 - 5,200 = 2,400

Answer : (i) Cash flow from asset (CFFA) = (1) - (2) - (3) = 23,300 - 25,100 - 2,400 = -4200

(ii) Cash flow from Assets are cash flows generated by the assets of the firm , it is also known as cash flow of the firms. This method does not use any financing sources like debt and stock purchase and sale.

In this example there is a negative cash flow, which can be excuse if the firm is in its intial stage and has been spending on growth and expansion but otherwise the reasons for negative cash flow must be investigated.

Cash flow from assets are useful in financial decisional making, as it provides the reasons and means for performance indicators as well as ways to raise additional funds.

In this case there is a negative cash flow which can be improved by either raising prices of product/services, reducing costs and current liabilities etc.