You have just been hired as a financial analyst for Basel Industries. Unfortunat

Question

You 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 $700,000 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 $440,000; 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?

Explanation / Answer

Cash from operating activities
Net Income $5,000,000
Add : Depreciation $440,000
Cash flow from operating activities $5,440,000

Cash flow from investing activities
Purchase of property, plant & equip.($5,500,000)
Cash flow from investing activities ($5,500,000)

Cash flow from financing activities
Proceeds from long-term debt $700,000
Cash flow from financing activities $700,000

Net increase in cash and cash equivalents $640,000
Beginning cash balance $100,000
Ending cash balance $740,000

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