The purpose of this assessment is to prepare the statement of cash flows and und
ID: 2464069 • Letter: T
Question
The purpose of this assessment is to prepare the statement of cash flows and understand the impact of cash flow on the financial health of an organization.
The comparative balance sheet of Morston Educational Supply at December 31, 2016, reported the following:
Morston’s transactions during 2016 included the following:
Based on the given data, complete the following tasks:
1. Prepare Morston’s statement of cash flows for the year ended December 31, 2016. Use the indirect method to report cash flows from operating activities.
2. Evaluate Morston’s cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.
3. If Morston plans similar activity for 2017, what is its expected free cash flow?
2016 2015 Current Assets: Cash $85,400 21,500 Accounts Receivable 14,800 $21,500 Merchandise Inventory 63,000 59,400 Current Liabilities: Accounts Payable $27,100 $26,100 Accrued Liabilities 10,400 10,900Explanation / Answer
(1)
(2)
As we can see, net cash flow from both operating and financing activities are positive. So, the firm is generating sufficient cash from its operations. At the same time, it is raising capital in form of issuance of bonds and equity. However, net cash flow from investing activities is negative indicating investment in longer term assets.
This reflects a likelihood that the firm is investing in its expansion process (being encouraged by its healthy positive operating cash flows), and is funding the expansion by raising additional capital.
NOTE: First 2 questions are answered.
CASH FLOW FROM OPERATING ACTIVITIES $ Net Income 59,600 Add: Depreciation 17,000 Add: Increase in Current Liabilities Accounts Payable 1,000 Add: Decrease in Current Assets Accounts Receivable 6,700 Less: Increase in Current Assets Inventory -3,600 Less: Decrease in Current Liabilities Accrued Liabilities -500 NET CASH FLOW FROM OPERATING ACTIVITIES (1) 80,200 CASH FLOW FROM INVESTING ACTIVITIES $ Purchase of equipment -55,100 Purchase of building -1,02,000 NET CASH FLOW FROM INVESTING ACTIVITIES (2) -1,57,100 CASH FLOW FROM FINANCING ACTIVITIES $ Dividend Paid -20,200 Increase in Long-Term Notes Payable 47,000 Increase in Common Stock 1,14,000 NET CASH FLOW FROM FINANCING ACTIVITIES (3) 1,40,800 NET CASH INFLOW/(OUTFLOW) DURING YEAR (1) + (2) + (3) 63,900 Beginning Cash Balance (2015) 21,500 Ending Cash balance (2016) 85,400 NET CASH INFLOW/(OUTFLOW) DURING YEAR 63,900Related Questions
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