STATEMENT OF CASH FLOWS:

Statement of cash flows provides information about the cash receipts and cash
payments of an entity. In some cases, it tells more about what is actually happening
in a business than either the balance sheet or income statement.

THE ASSIGNMENT
I.
1. Source and uses of cash
Alpha Corporation
1989 1991

The major source of cash would be cash received from

customers.
Major uses of cash is for investment in depreciable assets,
payments of long-term and short-term debts, and payment to
suppliers.

Beta Corporation
1989 1991

The major source of cash would be cash received from

customers.
The major use is for payment to suppliers and employees.

Gamma Corporation
1989 1991

The major source of cash would be cash received from

customers.
The major uses is for purchase of plant, property, and
equipment and also for 1989, purchase of treasury shares.

2. Was cash flow from operations greater than or less than net income? Explain
in detail the major reasons for the difference between these two figures.
Alpha Corporation
Cash from operations is greater than that from net income. The major
reason for the difference is that cash from operations applies cash basis

while net income applies accrual basis. The difference is caused by noncash items such as:
1989-1991
Depreciation and Restructuring and other unusual item- This reduces the
net income, however it doesnt affect the net cash
Also in 1989-1990
Inventory and Accounts ReceivableThis increases the net cash from
operations in comparison to net income.
And in 1990
Account Payable The decrease in accounts payable account means
that there is payment of debt but this value is not deducted in the
computation of net income.
Beta Corporation
1989 1990

Cash flow from operations was greater than that from net
income.

1991

Net income was greater than that from operations.

The major reason for the difference is that cash from operations applies
cash basis while net income applies accrual basis. The difference is caused
by non-cash items such as:
1989 - 1991
Depreciation and amortization - This reduces the net income, however it
doesnt affect the net cash
Decrease in Inventory - The decrease in inventory is not marked in net
income as this value was already accounted in a previous financial year.
But the cash arising out of this transaction was realized only in this financial
year. Hence, it results in an increase in net cash.

Also in 1991
Increase in accounts receivable - As a major part of the net income is
realized as accounts receivable, the net income increases, but cash flow
does not change.
Gamma Corporation
Cash from operations is greater than that from net income. The major
reason for the difference is that cash from operations applies cash basis
while net income applies accrual basis. The difference is caused by noncash items such as:
1989-1991
Depreciation and amortization - This reduces the net income, however it
doesnt affect the net cash.
1990-1991
Increase in restructuring reservethese are accrued expenses to cover
future cost of closing down a portion of a business. These are only
projected cost and do not affect the net cash.
3. Was the firm able to generate enough cash from operations to pay for all of
its capital expenditures?
Alpha Corporation
1989 1991 - Alpha Corporation was not able to generate enough cash from
operations to fund its capital expenditures.
Computation:
Particulars
Net cash from operation
Investment in depreciable assets
Investment in capitalized software
TOTAL

1989
76.5
(303.6)
(59.5)
(286.6)

1990
85.8
(174.4)
(43.1)
(131.7)

1991
120.3
(129.7)
(27.8)
(37.2)

Beta Corporation
1989 1990 - Beta Corporation was able to generate enough cash from
operations to fund its capital expenditures.
1991

- Beta Corporation was not able to generate enough cash from

operations to fund its capital expenditures.

Particulars
Net cash from operations
Less: capital expenditures
Total

1989
3, 670
(3,650)
20

1990
7,000
(4600)
2,400

1991
3,919
(6,031)
(2,112)

Gamma Corporation
1989 1991 - The cash from operating income was sufficient to fund the capital
expenditure.
Particulars
Net cash from operations
Less: capital expenditures
Total

1989
1990
1991
1,479,391
1,434,074 1,040,901
(1,223,038) (1,027,625) (737,548)
256,353
406,449
303,353

4. Did the cash flow from operations cover both the capital expenditures and
the firms dividend payment, if any?
Alpha Corporation
1989 1991 - Alpha Corporation was not able to generate enough cash from
operations to fund its capital expenditures and the firms dividend
payment.
Particulars
Net cash from operation
Investment in depreciable assets
Investment in capitalized software
Dividends paid
TOTAL

1989
76.5
(303.6)
(59.5)
(26.0)
(312.6)

1990
85.8
(174.4)
(43.1)
(7.2)
(138.9)

1991
120.3
(129.7)
(27.8)
(37.2)

Beta Corporation
1989 1990
1991

- Yes, the cash flow from operations covers both capital

expenditures and firms dividend payments.
- No, the cash flow from operations was insufficient to cover capital
expenditures and firms dividend payments.

Particulars
Net cash from operations
Less: capital expenditures
Dividend payments
Total

1989
3, 670
(3,650)
--------20

1990
7,000
(4600)
--------2,400

1991
3,919
(6,031)
--------(2,112)

Gamma Corporation
1989 - 1991 - The cash from operating income was sufficient to fund the capital
expenditure and dividend payments.
Particulars
Net cash from operations
Less: capital expenditures
Dividend payments
Total

1989
1990
1991
1,479,391
1,434,074 1,040,901
(1,223,038) (1,027,625) (737,548)
------------------------256,353
406,449
303,353

5. If it did, how did the firm invest its excess cash?

Beta Corporation
1989-1990

- The excess cash can be used for payments towards working

capital line and equipment line of credit and also for principal
payments under capital lease obligations.

Gamma Corporation
1989 1991 - The excess cash could be used for funding a portion of payments
of increase of other assets, payments to retire debt or purchase of
treasury shares.
And also in 1991 - The excess cash is used to purchase Kienzle business.

6. If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?
Alpha Corporation
1989 - Sources of cash the firm used to pay for capital expenditures and/or
dividends are proceeds from long-term debt and short term borrowings.
1990 - Sources of cash the firm used to pay for capital expenditures and/or
dividends are proceeds from discontinued operations, proceeds from
long-term debt and that of sales of depreciable assets.
1991 - Sources of cash the firm used to pay for capital expenditures and/or
dividends are proceeds from disposal of depreciable and other assets.
Beta Corporation
1991 -The capital expenditures were funded bythe proceeds from the issuances
of common stock.
7. Were the working capital (current asset and current liability) accounts other
than cash and cash equivalents primarily sources of cash, or users of cash?
Alpha Corporation
1989
1990-1991

Net working capital account is primarily use of cash.

Net working capital account is primarily a source of cash.

Beta Corporation
1989 1991

The working capital accounts other than that of cash and

cash equivalents are primarily users of cash.

Gamma Corporation
1989-1990
1991

The working capital was primarily users of cash.

The working capital was primarily a source of cash.

8. What other major items affected cash flow?

Alpha Corporation
1989-1991

- Other major items that affected cash flows would be purchase of

treasury stock, dividends payment, sale of common stock and
investment in capitalized software

Beta Corporation
1989-1990

- The other items that affected cash flows would be proceeds

from issuance of common stock and exchange rate changes on
cash.

Gamma Corporation
1989-1990

-The other major items that affected cash flows would be proceeds
from issuance of debt and issuance of treasury shares.

II. TREND
1. Net income
Alpha Corporation

We can see that the net income is showing an

increasing trend after the dip in the previous year
(1990).

Beta Corporation

The net income is showing a consistent

increasing trend as the income increasing from 1989
to 1991 (from $417 to $6,323).

Gamma Corporation

We can see that the net income is

continuously decreasing from 1989-1991(from
$1,072,610 to $617,427)

2. Cash Flow from (continuing) operation

Alpha Corporation

The cash flow from operations is continuously

increasing from 1989-1991(from $76.5 to $120.3).

Beta Corporation

The cash flow from operations is showing a

decreasing trend after an increasing trend in the
previous year(1990)

Gamma Corporation

The cash flow from operations is continuously

decreasing from 1989-1991.

3. Capital Expenditure
Alpha Corporation

The capital expenditure of the company is

decreasing from 1989-1991(from $363.1 to $157.5).

Beta Corporation

The capital expenditure of the firm is increasing

from 1989-1991 (from $3,650to $6,031).

Gamma Corporation

The capital expenditure of the company is

decreasing from 1989-1991(from $1,223,038 to
$737,548).

4. Dividend
Alpha Corporation

The dividend has been decreasing

continuously for the previous three years.

Beta Corporation

As the company has not provided any

dividends till now, it is not possible to assess the trend
for dividends.

Gamma Corporation

As the company has not provided any

dividends till now, it is not possible to assess the trend
for dividends.

5. Net Borrowing

Alpha Corporation

The net borrowing of the company is

increasing from a dip in the previous year.

Beta Corporation

The net borrowing of the company is

decreasing.

Gamma Corporation

The net borrowing of the company is

decreasing.

6. Working Capital Account

Alpha Corporation

The working capital of the company is showing

an increasing trend.

Beta Corporation

The working capital of the company is showing

a consistent increasing trend.

Gamma Corporation

The working capital of the company is showing

a decreasing trend.

III.
Alpha Corporation
As we can see, although Alpha Corporation was incurring losses for the
past years; losses are decreasing giving a good indication that the
company can still restore the business. But the fact that the cash
generated from operating activities was not enough to cover its capital
expenditures and that of dividend payments caused them to resort to
borrowings gives us a picture that the company seems to be unhealthy
and is in unstable condition.
Beta Corporation
Beta Corporations net income is increasing and they were able to
generate enough cash from operations to fund their capital expenditures.
In fact, they were able to use the excess cash to settle their obligations.
And in cases where they are short of cash like in the year 1991, the
companys capital expenditures were funded by the proceeds from
issuance of stocks. In addition, their working capital also shows an
increasing trend giving us a picture of a stable and healthy company.
Gamma Corporation
As we can see from the statement of cash flows, the net income is
decreasing every year. Also, the cash flow from operating activities and
working capital of the company isdecreasing; this is a major cause of
concern. The capital expenditure of the company is increasing which is
mainly funded by borrowings. This means that the company is going
through a negative cycle as most of the indicators have a negative trend.
Hence, the company needs to make a plan in future.