Some Hints:

Q. 1
PEORIA CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2012

A. Cash from Operating Activities $172,000

B. Cash from Investing Activities (350,000)
C. Cash from Financing Activities 140,000
Net Cash Flow (A+B+C) (38,000)
Opening Cash 90,000
Closing Cash 52,000

Memorandum to the President:

TO: President of Peoria Corp.
FROM: write your name
DATE: .
SUBJECT: Analysis of Cash flows

You recently expressed concern that in spite of the profitable year according to the income statement, cash
decreased during 2012. Furthermore, there was a concern about the decrease in the companys cash balance
during 2012 to $52,000 at year end, given that existing loan covenants require a $50,000 minimum balance at
all times. My thoughts and a copy of the 2012 statement of cash flows follow. Although net income on an
accrual basis was $225,000, net cash flow from operating activities was only $172,000. One of the reasons is
that cash collections were only $1,200,000 even though sales were $1,250,000. Also, inventory was increased
by $30,000 during the period, and accounts payable was reduced by $18,000. Similarly, income taxes payable
was reduced by $20,000, resulting in a further drain on cash. Finally, two major acquisitions were made during
the year: $200,000 was spent on new plant and equipment and another $150,000 to acquire new land. These
were only partially offset by the sale of additional stock for $150,000 and the issuance of additional notes in the
amount of $50,000. Finally, cash dividends amounted to $60,000, a further drain on cash.
Our cash flow should improve in future years without the need to invest so heavily in new property, plant, and
equipment. We can also improve our operating cash flow by accelerating the collection of receivables as much
as possible. Similarly, we should be able to reduce the amount of inventory on hand at any one time and over
the long run reduce the cash paid for inventory purchases.
 PEORIA CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2012
(IN THOUSANDS OF DOLLARS)
A. Cash Flows from Operating Activities
1. Direct Method
Cash Flows from Operating Activities
Cash collections from customers .............................................$ 1,200
Cash payments for:
Inventory.................................................................................. $ (748)
Operating expenses.................................................................... (85)
Interest........................................................................................ (25)
Income taxes............................................................................... (170)
Total cash payments.............................................................. $(1,028)
Net cash provided by operating activities......................................... $ 172

2. Indirect Method
Net income........................................................................................ $ 225

Adjustments to reconcile net income to net Cash provided by operating activities:

Depreciation expense.................................................................. 50
Increase in accounts receivable.................................................. (50)
Increase in inventory................................................................... (30)
Decrease in prepayments............................................................ 10
Decrease in accounts payable..................................................... (18)
Increase in other accrued liabilities.............................................. 5
Decrease in income taxes payable.............................................. (20)
Net cash provided by operating activities......................................... $ 172

B. Cash Flows from Investing Activities

Acquisition of land....................................................................... $(150)

Acquisition of plant and equipment.............................................. (200)
Net cash used by investing activities ................................................ $(350)

C. Cash Flows from Financing Activities

Additional long-term borrowings................................................$ 50
Issuance of common stock .......................................................... 150
Cash dividends paid.................................................................... (60)
Net cash provided by financing activities .......................................... $ 140
Net decrease in cash................................................................................................$ (38)
Cash balance, December 31, 2011............................................................................. 90
Cash balance, December 31, 2012........................................................................... $ 52
Q. 2 DECISION CASE: DIVIDEND DECISION AND THE STATEMENT
OF CASH FLOWS

Changes in account balances and explanations (in thousands of dollars):

Net Change
Dr. (Cr.) Explanation
Cash 30
Accounts receivable 50
Inventory 150
Prepayments (15)
Land 1,055 Issued bonds to acquire 700 and cash for 355
Plant and equipment 1,700 Purchase
Accumulated depreciation (250) Depreciation expense
Long-term investments (400) Sale
Patents (100) Amortization
Accounts payable (70)
Other accrued liabilities (60)
Income taxes payable (70)
Dividends payable 200 Paid dividends
Short-term notes payable (200) Reclassification of note
Long-term notes payable 200 Reclassification of note
Bonds payable (700) Issued for land
Common stock (500) Issued stock
Retained earnings (1,020) 1,020 Net income
Total Nil

Conversion of income statement items to a cash basis (in thousands of dollars):

Income Statement Amount Adjustment Cash Flows
Sales revenue $8,000 $8,000
Increase in accounts receivable (50)
Cash collected from customers $7,950
Cost of goods sold 4,500 $4,500
+ Increase in inventory 150
Increase in accounts payable (70)
Cash paid to suppliers $4,580
Operating expenses 1,450 $1,450
Decrease in prepayments (15)
Increase in other accrued liabilities (60)
Depreciation included on income statement (250)
Amortization included on income statement (100)
Cash paid for operating expenses $1,025
Interest expense 350 + No interest payable(No outflow) $ 350
Income tax expense 680 $ 680
Increase in income taxes payable (70)
Cash paid for taxes $ 610
Net income $1,020 Net cash flow from operations $1,385
 BAILEY CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2012
(IN THOUSANDS OF DOLLARS)
A. Cash Flows from Operating Activities
Cash collected from customers......................................................... $ 7,950
Cash payments:
For inventory.............................................................................. (4,580)
For operating expenses.............................................................. (1,025)
For interest.................................................................................. (350)
For income taxes......................................................................... (610)
Total cash payments.................................................................. $(6,565)
Net cash provided by operating activities........................................................ $ 1,385

B. Cash Flows from Investing Activities

Sale of long-term investments..................................................... $ 400
Acquisition of land....................................................................... (355)
Acquisition of plant and equipment.............................................. (1,700 )
Net cash used by investing activities .................................................................. $(1,655)

C. Cash Flows from Financing Activities

Issuance of additional common stock.......................................... $ 500
Payment of 2011 cash dividend................................................... (200 )
Net cash provided by financing activities ......................................................... $ 300

Net increase in cash (A+B+C)......................................................................................... $ 30

Cash balance, December 31, 2011................................................... 450

Cash balance, December 31, 2012................................................... $ 480

Supplemental Schedule of Noncash Investing and Financing Activities

Acquisition of land by issuance of bonds..................................... $ 700
Reclassification of long-term notes due within next year ............. $ 200

Recommendations:
Bailey Corp. should be able to safely pay a cash dividend in 2013 of $250,000 (note that there are now 250,000
shares of stock outstanding). The cash provided by operating activities of $1,385,000 indicates that the company is
generating a very significant amount of cash from the business. Because the company invested heavily in new plant
and equipment during 2012, it should not need to reserve large amounts of cash for capital expenditures in the near
future. The profit margin of 12.75% indicates that management is doing a good job of controlling costs.

Bailey will need to pay $200,000 in 2013 to retire the short-term notes payable. In assessing the companys cash
needs in future years, it would be important to know how soon any of the bonds payable will be due for retirement.
Assuming that a large portion of the bonds is not due to be retired in 2013, Bailey should have no problem in paying
its tenth annual dividend of $1 per share.