You have just been hired as a financial analyst for Barrington Industries. Unfor

Question

You have just been hired as a financial analyst for Barrington 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 $750,000 in dividends to common shareholders. Throughout the year, the firm purchased $5.4 million of machinery that was needed for a new project. You have just spoken to the firm's accountants and learned that 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. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar, if necessary.

Explanation / Answer

Cash flow statement of Barrington Industries Cash from operating activities net income during the year 5000000 add : depreciation expense 460,000 A Net cash from operating activities 5,460,000 Cash flow from investing activities Machinery purchases -5400000 B net cash flow from investing activities -5400000 Cash flow from financing activities Issue long-term debt 1000000 Less : Dividend to common stockholder -750000 C Net cash flow from financing activities 250000 D Net increase in cash = A+B+C 310,000 E Add : Opening cash balance 100000 F Closing cash balance = D+E 410,000 * No information is given regarding time the debt has been raised and whether interest payment has been made of not. We have assumed that debt is raised at the end of the year and hence no interest expenses are paid in cash. Had there been other assumed closing cash balance would have reduced by interest amount paid for debt (under financing activities)

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