Question

Cash Flow Statement									2016			2017
Cash, beginning of year									$ 1,512.00			$ 1,176.00
Operating Activities
	Net Income								$ 1,627.00			$ 2,827.00
	Plus Depreciation								$    908.00			$ 1,292.00
	Minus increase in accounts receivable								$ (4,034.00)			$ (5,648.00)
	Minus increase in inventory								$ (3,302.00)			$ (4,732.00)
	Minus increase in prepaid expenses								$ (1,360.00)			$ (1,700.00)
	Plus increase in accounts payable								$ 2,388.00			$ 3,997.00
	Plus increase in income taxes payable								$    252.00			$       -
	Plus increase in accruals & other cur. Liab.								$ 1,365.00			$ 1,656.00
		Net Cash from operating activities							$ (2,156.00)			$ (2,308.00)
Investment Activities
	Fixed asset acquisitions								$ (2,780.00)			$ (3,838.00)
	Change in intangible assets								$    (21.00)			$    (17.00)
	Change in all other noncurrent activities								$   (467.00)			$   (195.00)
		Net Cash from investing activities							$ (3,268.00)			$ (4,050.00)
Financing Activities
	Change in notes payable								$ 2,038.00			$ 3,080.00
	Change current maturities--L.T.D.								$    452.00			$    786.00
	Change in long-term debt								$ 3,160.00			$ 3,250.00
	Change in Com Stock & paid-in cap								$       -			$       -
	Dividends paid								$   (562.00)			$   (837.00)
		Net Cash from financing Activities							$ 5,088.00			$ 6,279.00
Net Change in Cash									$   (336.00)			$    (79.00)
Cash, end of year									$ 1,176.00			$ 1,097.00

Referring to HTCM’s statement of cash flow for 2016 and 2017, assess HTCM’s cash flow situation noting both inflows and outflows?

Answer 1

Ans: )

Cash Flow Analysis

1. Cash Flow from Operations:

In the assessment of cash flow from operations of the company it can be observed that there is a huge increase in both accounts receivable and inventories along with the large increase in the accounts payable and other current liabilities, It can also be noticed that there is a significant increase in the operating profits of the company in 2017 in comparison to 2016, all these factors indicate towards a business expansion by the company in recent years due to which both the current assets and liabilities of the company have substantially increased leading to a higher market exposure, same can be substantiated by comparing the operating cash flow to operating income ratio of the years 2016 & 2017:

Operating Cash Flow to Operating Income Ratio:

For 2016 = -2,156/ 1,627= -1.325

For 2017 =-2,308/ 2,827=-0.816

It can be observed that although the operating cash flows and the ratio are still negative but there is a substantial improvement in the ratio which indicates better cash flow management.

2. Cash Flow from Investing Activities:

The assessment of cash flow from investing activities also indicates towards a business expansion as there is a large increase in the fixed asset acquisitions by the company in comparison to 2016 resulting in huge negative cash flows from investing.

3. Cash Flow from Financing Activities:

The cash flow from financing activities show a constant increase in the loan balances and other long term liabilities of the company during the past 2 years leading to large positive cash flows from financing which are being used to fund the business expansion of the company thus allowing the company to maintain its overall liquidity.

4. Overall cash Flows:

It can be observed that the large increase in loan financing in the year 2016 & 2017 is being effectively used to offset the huge negative balances from the operating and investing activities of the company resulting in a small change in the liquid cash balance of the company by just 79/- which enables smooth financing of the business expansion and to avoid a cash crunch due to the same.

In light of the above observations the company should ensure that it has appropriate billing and collection procedures in place to enable:

A.)Proper handling and processing of the exposure towards debtors, enabling it to avoid cash crunch in the future.

B.) Timely processing of payments to creditors.

C.) Safeguard and maintenance of the new assets and equipment along with the increase inventories.

D) Timely repayment of the loan balances and maintaining a sound debt equity ratio.