9. Problem 3.13 Statement of Cash Flows You have just been hired as a financial

Question

9. Problem 3.13 Statement of Cash Flows 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 $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 lono-term debt of $1 million at a 6% interest rate. what was the firm's end-of-year cash balance? Recreate the firm's cash flow statement to arrive at your answer. Write out your answer completely, For example, 5 million should be entered as s,o00,000. Round your answer to the nearest dollar, if necessary

Explanation / Answer

The firm's ending cash balance is $360,000

Working:

Cash flow statement for the curent year Cash flow from operations Net income 5000000 Add: Depreciation 460000 Cash flow from operations 5460000 Cash flow from investing activities Purchase of plant and machinery -5500000 Cash flow from financing activity Issue of long term liability 1000000 Payment of cash dividend -700000 Cash flow from financing activities 300000 Net cash flow 260000 Beginning cash balance 100000 Ending cash balance 360000 Cash Details Debit Credit Beg.Bal. 100000 Cash flow from operations * 5460000 Dividend paid 700000 Machinery purchase 5500000 Issue Long term debt 1000000 Ending balance 360000 6560000 6560000 Net Income 5000000 Add: Depreciation expense 460000 Cash flow from operations * 5460000

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