financial accounting
Chapter 5
Statement of Financial Position and Statement of Cash Flows
Presented by
Vincent Liuden
Kenneth Antonius
Shan Markus Susanto
Page 279 ca5-6
The partner of Kappeler Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the cash flow statement for the year ended 31st December 2010, Because he must leave on an emergency, he asks you to finish the letter by explaining the disparity between net income and cash low, the importance of operating cash flow and the renewable sources of cash flow and possible suggestion to improve the cash position
Dear Mr. Kappeler:
I have good news and bad news about the financial statements for the year ended December 31, 2010.
The good news is that net income of $100,000 is close to what you predicted in the strategic plan last
year, indicating strong performance this year. The bad news is that the cash balance is seriously low.
Enclosed is the Statement of Cash Flows, which best illustrates how both of these situations occurred
simultaneously.
If you look at the operating activities, you can see that no cash was generated by operations due to the
increase in accounts receivable and inventory and reduction in accounts payable. In effect, these
events caused net cash flow provided by operating activities to be lower than net income; they reduced
your cash balance by $116,000. (*1)
The corporation made significant investments in equipment and land. These were paid from cash
reserves. These purchases used 75% of the company’s cash. In addition, the redemption of the bonds
improved the equity of the corporation and reduced interest expense. However, it also used 25% of the
corporation’s cash. It is normal to use cash for investing and financing activities. But when cash is used,
it must also be replenished.
Operations normally provide the cash for investing and financing activities. Since there is a finite
amount of assets to sell and funds to borrow or raise from the sale of capital stock, operating activities
are the only renewable source of cash (*2).
That is why it is important to keep the operating cash flows
positive. Cash management requires careful and continuous planning.
There are several possible remedies for the current cash problem. (*4)
First, prepare a detailed analysis of
monthly cash requirements for the next year.
Second, investigate the changes in accounts receivable
and inventory and work to return them to more normal levels.
Third, look for more favorable terms with
suppliers to allow the accounts payable to increase without loss of discounts or other costs.
Finally,
since the land represents a long-term commitment without immediate plans for use, consider shopping
for a low interest loan to finance the acquisition for a few years and return the cash balance to a more
normal level. (*3)
If you have additional questions or need one of our staff to address this problem, please contact me at
your convenience.
Sincerely yours,
Partner in Charge
Question And Answer
Session
Thank
you
financial accounting
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financial accounting
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