have just been hired as a financial analyst for Basel Industries. Unfortunately,
ID: 1180585 • Letter: H
Question
have just been hired as a financial analyst for Basel 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 $800,000 in dividends to common shareholders. Throughout the year, the firm purchased $5.5 million of machinery that was needed for a new project. You have just spoken to the firm's accountants and annual depreciation expense for the year is $460,000; 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 5% interest rate. What was the firm's end-of-year cash balance? Recreate the firm's cash flow statement to arrive at your answer
Explanation / Answer
Hi,
Please find the answer as follows:
Cash Flow Statement (Recreated)
Answer is 260000.
Thanks.
Net income 5000000 Add Depreciation 460000 Net cash flows from operating activities (1) 5460000
Cash flows for investing activities
Purchase of Machinery -5500000 Net cash flows for investing activities (2) -5500000
Cash flows from financing activities
Issuance of Long Term Debt 1000000 Dividends Paid -800000 Net cash flows from financing activities (3) 200000
Net Increase in Cash (1+2+3) 160000 Opening Cash Balance 100000 Closing Cash Balance 260000
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