Question

You have just been hired as a financial analyst for Barrington Industries. Unfortunately, company headquarters (where all of the firm's records are kept) has been destroyed by fire. So, your first job will be to recreate the firm's cash flow statement for the year just ended. The firm had $100,000 in the bank at the end of the prior year, and its working capital accounts except cash remained constant during the year. It earned $5 million in net income during the year but paid $700,000 in dividends to common shareholders. Throughout the year, the firm purchased $5.4 million of machinery that was needed for a new project. You have just spoken to the firm's accountants and learned that annual depreciation expense for the year is $450,000; however, the purchase price for the machinery represents additions to property, plant, and equipment before depreciation. Finally, you have determined that the only financing done by the firm was to issue long-term debt of $1 million at a 6% interest rate.

What was the firm's end-of-year cash balance? Recreate the firm's cash flow statement to arrive at your answer. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar, if necessary.

Answer 1

Cashflow from operating activities = Net income + Depreciation expense - Changes in working capital
= $5,000,000 + $450,000 - $0
= $5,450,000

Cashflow from investing activities = Gross expenditure in the year = -$5,400,000

Cashflow from financing activities = Issue of long term debt - Dividends paid
= $1,000,000 - $700,000
= $300,000

Net cash generated from all the activities = $5,450,000 - $5,400,000 + $300,000
= $350,000

Ending cash balance = Begining cash balance + Net cash generated from all the activities
= $100,000 + $350,000
= $450,000