Question

Using the information provided by the Statement of Cash Flows, specify two questions that you would ask management if you were a financial analyst attempting to issue a buy / sell recommendation to clients. Explain why you would ask each question.

The Shelburne, Vermont, company’s primary markets are New York, Boston, and Chicago. Sales have jumped dramatically in recent years. Such dramatic growth has significant implications for cash flows. Provided below are the operating sections of the most recent two years' statements of cash flows, along with summary information about investing and financing activities for those years:

			Current Year		Prior Year
Cash flow from operating activities:
	Net income		$17,523		$838,955
	Adjustments to reconcile net income to net
	Cash provided by operating activities
	Deferred income taxes		(69,524)		(146,590)
	Depreciation and amortization		316,416		181,348
	Changes in current assets and current liabilities:
	Accounts receivable, trade		(38,267)		(25,947)
	Inventories		(1,599,014)		(1,289,293)
	Prepaid and other current assets		(444,794)		(113,205)
	Deposits and other assets		(24,240)		(83,044)
	Accounts payable		2,017,059		(284,567)
	Accrued expenses		61,321		170,755
	Accrued interest payable, debentures				(58,219)
	Other				(8,960)
	Income taxes payable				117,810
	Net Cash provided by (used for)
	operating activities		236,480		(700,957)
	Net cash used for investing activities		(2,102,892)		(4,422,953)
	Net cash (used for) provided by financing activities		(315,353)		9,685,435
	Net change in cash and cash equivalents		(2,181,765)		4,561,525
Other Information:
	Current Liabilities		4,055,465		1,995,600
	Total Liabilities		4,620,085		2,184,386
	Net Sales		20,560,566		17,025,856

Answer 1

Looking at the cash flow in question, here are the two questions that I would ask

Question 1

What are the constituents of cash outflow from investing activities?

rationale - If you see, net outflow related to Investing Activities has halved from the previous year. It is less than 50% of what it was in the preceding year but the DEPRECIATION expense has DOUBLED. This is not in sync. A breakup of the outflow from investing activities can throw some more light on this issue.

Question 2

What has the company purchased that has led to such an increase in Accounts Payable balance?

rationale - As compared to previous year, there is an INFLOW from accounts payable. This means that the balance of accounts payable is much more than it was at the end of previous year. What is the reason behind this increase? What has the company purchased? Is there an unusual expense during the year? If yes, what is the reason?

Bonus- I would also like to know about the SIGNIFICANT decrease in NET INCOME even though there was an INCREASE IN NET SALES.