Chemalite, Inc. (B)

31-Dec-91 31-Dec-92AssetsCash 113,000 9,490Accounts receivable 69,500 139,530Inventories - raw material 55,000 75,450 Average stock

Inventories - finished goods 104,680To give required service to wholesalersIncludes $5,000 of depreciation

Prepaid insurnace 65,000 Insurnace $97,500 (July 92 - Dec 93)

Property, planty and equipment 212,500 1,120,000

New building is $600,000 / 10 yrs / SLM / half in cashOld machine sold for $215,500Cost of new machine $520,000

Accumulated depreciation -10,625 -56,000Land 250,000 Land added for new production facility / half in cashPatent 100,000 75,000Total assets 539,375 1,783,150

Liabilities and Owners' EquityTaxes payable 10,900 9,950ST debt 200,000 Matter of concern?Deferred income taxes 26,730Notes payable (10% ) 425,000 Towards EMI from June 30, 1994Long-term debt (10% ) 510,000 Loan effective June 30 at 10% paid annually

Dividends payable 10,000 12,0001991 Dividend paid in Jan 1992 $0.02Dividend payable in 1992: 10% of net income

Common stock 500,000 500,000Retained Earnings 18,475 125,470Treasury stock -26,000 Repurchased 20,000 @ $1.30 per sahreTotal liabilities and owners' equity 539,375 1,783,150

Balance Sheet as at Dec 31, 1991 and 1992Remarks

31-Dec-91 31-Dec-92Sales 754,500 1,886,250 Increase in sales 150% (1/2 growth is credit for 40 days)Material -195,000 -452,700 Looks like cash expensesLabor -275,000 -660,000 Looks like cash expensesRent -50,000 -25,000 Looks like cash expensesUtilities -30,000 -82,000 Looks like cash expensesDepreciation -10,625 -61,625Gross margin 193,875 604,925Advertising -22,500 -70,000 Looks like cash expensesResearch and development -63,250 Looks like cash expensesInsurance -32,500 Looks like cash expensesAmortization of patent -25,000 -25,000Selling and administration expenses -75,000 -195,750 Looks like cash expensesGain on sale of equipment 24,250Interest expenses -750 -58,750 Looks like cash expensesProtypes -23,750Legal fees -7,500Income before taxes 39,375 183,925 400% increase?Income taxes -10,900 -64,930Net income 28,475 118,995

Income Statement for the Years Ended Dec 31, 1991 and 1992Remarks

Entry No. Details

CF

Type Cash AR

Inven

RM

Inven

FGs

Prep

Insur PPE Land Patent

Accum

Depre

Taxes

Payab

ST

Debt

Deffer

IT

Notes

Payab

LT

Debt

Divid

Payab

Comm

Stock

Ret

Earn

Treasur

Stock

Opening balance sheet 113,000 69,500 55,000 212,500 100,000 10,625 10,900 10,000 500,000 18,4751 Sales on credit 1,886,250 1,886,2501 Cash collected from customers O 1,816,220 -1,816,2202 Raw material consumed -452,700 -452,7002 Raw material added O -473,150 473,1503 Finished goods inventory O -99,680 99,6804 Insurance exp / prepaid O -97,500 65,000 -32,5005 Land and Building bought I -425,000 600,000 250,000 425,0005 Depreciation on the machine sold 10,625 -10,6255 Old machine sold I 215,500 -212,500 -21,250 24,2505 New machine bought I -520,000 520,0005 Depreciation for building 25,000 -25,0005 Depreciation for new machine 26,000 -26,0005 Depreciation on inventory 5,000 5,0006 Income taxes payable O -38,200 26,730 -64,9306 Income tax paid O -950 -9507 Short term debt F 200,000 200,0007 LT Secured loan F 510,000 510,0008 Dividend paid in Jan 2002 F -10,000 -10,0008 Dividend declared 2002 12,000 -12,0009 Shares repurchased F -26,000 -26,00010 Labor O -660,000 -660,00011 Rent O -25,000 -25,00012 Utilities O -82,000 -82,00013 Advertising O -70,000 -70,00014 Research and development O -63,250 -63,25015 Amortization of patent -25,000 -25,00016 Selling and Administrative exp O -195,750 -195,75017 Interest exp O -58,750 -58,750

Close BS 9,490 139,530 75,450 104,680 65,000 1,120,000 250,000 75,000 56,000 9,950 200,000 26,730 425,000 510,000 12,000 500,000 125,470 -26,000Close BS 9,490 139,530 75,450 104,680 65,000 1,120,000 250,000 75,000 56,000 9,950 200,000 26,730 425,000 510,000 12,000 500,000 125,470 -26,000

1,839,150 1,839,150

CFS – Direct Method

Cash collected from customers 1,816,220Raw material added -473,150Finished goods inventory -99,680Insurance exp / prepaid -97,500Income taxes payable -38,200Income tax paid -950Labor -660,000Rent -25,000Utilities -82,000Advertising -70,000Research and development -63,250Selling and Administrative exp -195,750Interest exp -58,750Net cash from operating activities -48,010

Land and Building bought -425,000Old machine sold 215,500New machine bought -520,000Net cash from investing activities -729,500

Short term debt 200,000LT Secured loan 510,000Dividend paid in Jan 2002 -10,000Shares repurchased -26,000Net cash from financing activities 674,000Net decrease in cash -103,510Cash at beginning of year 113,000Cash at the end of the year 9,490

Cash Flow from Operating Activities

Cash Flows from Investing Activities

Cash Flows from Financing Activities

31-Dec-91 31-Dec-92AssetsCash 113,000 9,490 -103,510 118,995Accounts receivable 69,500 139,530 70,030 CA Decreases cash -70,030Inventories - raw material 55,000 75,450 20,450 CA Decreases cash -20,450Inventories - finished goods 104,680 104,680 CA Decreases cash to the extent of $99,680 -99680Prepaid insurnace 65,000 65,000 CA Decreases cash -65,000

Property, planty and equipment 212,500 1,120,000 907,500I

NCE; NORDep: $61, 625, CG: 24,250Building: $600,000; Equip: 520,000; Equip sold: $215,500 -24,250 -517000

Accumulated depreciation -10,625 -56,000 -45,375 NCE Dep: $61, 625 61625Land 250,000 250,000 I Newly bought -212500Patent 100,000 75,000 -25,000 NCE Amortization 25,000Total assets 539,375 1,783,150 1,243,775

Liabilities and Owners' EquityTaxes payable 10,900 9,950 -950 CL Decreases cash -950ST debt 200,000 200,000 F Increases cash 200,000Deferred income taxes 26,730 26,730 CL Increases cash 26,730Notes payable (10%) 425,000 425,000Long-term debt (10%) 510,000 510,000 F 510,000Dividends payable 10,000 12,000 2,000 F Dividend paid: $10,000 -10000Common stock 500,000 500,000 0Retained Earnings 18,475 125,470 106,995 Net Income 1992 = $106,995 + $12,000Treasury stock -26,000 -26,000 F Decreases cash -26,000Total liabilities and owners' equity 539,375 1,783,150 1,243,775

-48,010 -729,500 674,000

Balance Sheet as at Dec 31, 1991 and 1992Changes FCFRemarksType OCF ICF

CFS – Indirect Method

CFSIndirect Method

Entry No. Details

CF

Type Cash

Ret

Earn OCF

Opening balance sheet 113,000 18,475 118,9951 Sales on credit 1,886,2501 Cash collected from customers O 1,816,220 -70,0302 Raw material consumed -452,7002 Raw material added O -473,150 -20,4503 Finished goods inventory O -99,680 -99,6804 Insurance exp / prepaid O -97,500 -32,500 -65,0005 Land and Building bought I -425,0005 Depreciation on the machine sold -10,625 10,6255 Old machine sold I 215,500 24,250 -24,2505 New machine bought I -520,0005 Depreciation for building -25,000 25,0005 Depreciation for new machine -26,000 26,0005 Depreciation on inventory6 Income taxes payable O -38,200 -64,930 26,7306 Income tax paid O -950 -9507 Short term debt F 200,0007 LT Secured loan F 510,0008 Dividend paid in Jan 2002 F -10,0008 Dividend declared 2002 -12,0009 Shares repurchased F -26,00010 Labor O -660,000 -660,00011 Rent O -25,000 -25,00012 Utilities O -82,000 -82,00013 Advertising O -70,000 -70,00014 Research and development O -63,250 -63,25015 Amortization of patent -25,000 25,00016 Selling and Administrative exp O -195,750 -195,75017 Interest exp O -58,750 -58,750

Close BS 9,490 125,470Close BS 9,490 125,470

118,995 -48,010Income

Analysis

31-Dec-91 31-Dec-92 31-Dec-91 31-Dec-92 31-Dec-91 31-Dec-92AssetsCash 113,000 9,490 21 1 100 8Accounts receivable 69,500 139,530 13 8 100 201Inventories - raw material 55,000 75,450 10 4 100 137Inventories - finished goods 104,680 6Prepaid insurnace 65,000 4Property, planty and equipment 212,500 1,120,000 39 63 100 527Accumulated depreciation -10,625 -56,000 -2 -3 100 527Land 250,000 14Patent 100,000 75,000 19 4 100 75Total assets 539,375 1,783,150 100 100 100 331

Liabilities and Owners' EquityTaxes payable 10,900 9,950 2 1 100 91ST debt 200,000 11Deferred income taxes 26,730 1Notes payable (10% ) 425,000 24Long-term debt (10% ) 510,000 29Dividends payable 10,000 12,000 2 1 100 120Common stock 500,000 500,000 93 28 100 100Retained Earnings 18,475 125,470 3 7 100 679Treasury stock -26,000 -1Total liabilities and owners' equity 539,375 1,783,150 100 100 100 331

Balance Sheet as at Dec 31, 1991 and 1992 VCS HCS

Analysis

31-Dec-91 31-Dec-92 31-Dec-91 31-Dec-92 31-Dec-91 31-Dec-92Sales 754,500 1,886,250 100 100 100 250Material -195,000 -452,700 -26 -24 100 232Labor -275,000 -660,000 -36 -35 100 240Rent -50,000 -25,000 -7 -1 100 50Utilities -30,000 -82,000 -4 -4 100 273Depreciation -10,625 -61,625 -1 -3 100 580Gross margin 193,875 604,925 26 32 100 312Advertising -22,500 -70,000 -3 -4 100 311Research and development -63,250 -3 100Insurance -32,500 -2 100Amortization of patent -25,000 -25,000 -3 -1 100 100Selling and administration expenses -75,000 -195,750 -10 -10 100 261Gain on sale of equipment 24,250 1 100Interest expenses -750 -58,750 0 -3 100 7833Protypes -23,750 -3Legal fees -7,500 -1Income before taxes 39,375 183,925 5 10 100 467Income taxes -10,900 -64,930 -1 -3 100 596Net income 28,475 118,995 4 6 100 418

Income Statement for the Years Ended Dec 31, 1991 and 1992 VCS HCS

Objectives of Cash Flow Statements

Ability of an enterprise to generate cash and cash equivalents Timing and certainty of generation

Needs of enterprise to utilize cash flows Pay obligations Conducting operations Providing returns to investors

Changes in net assets, financial structure Comparability of reporting of operating performance by different

enterprises Checking accuracy of past assessments of future cash flows Examining relationship between profitability and net cash flow and

impact of changing prices

Structure of Statement of Cash Flows

Operating activities Flow cash related to day-to-day business Bottom line is cash from operations Methods of arriving at..,

– Direct method– Indirect method

Describes why change in cash position is different from net income Reconciles net income and cash flow Undoing accruals

Investing activities Transactions related to non-current assets involving cash

Financing activities Changes in borrowings and owners’ equity that affected cash Includes transactions that affect the capital structure of the company and are

not reflected in the year’s income statement

Operating Activities

Principal revenue-producing activities Results from transactions and other events Cash receipts from..,

Sale of goods Rendering services Royalties, fees, commissions and other revenue Refund of income taxes Receipt of insurance premium Receipts and payments to derivative contracts – for the purpose of hedging

Cash payments to.., Suppliers Employees Insurance premiums Income taxes

Investing Activities

Acquiring and disposal of.., Fixed assets Shares, warrants and debt instruments Interest in JVs Cash advance and loans made to third parties Trading of derivatives

Financing Activities

Cash proceeds and disposals from.., Issuing financial instruments Loans, notes, and bonds ST and LT borrowings

Methods of Reporting Cash Flows from Operating Activities

Direct method Discloses major classes of..,

Gross cash receipts Gross cash payments

Indirect method Adjusting NP or NL for..,

Non-cash transactions Deferrals or accruals of past Income or expense associated with investing and

financing

Cash Flows over the Firm’s Life Cycle Implications for CF Projections

Cash Inflows and Outflows

Funds Flow

Information from Cash Flow Statement

Profitable? Steady profits? How much cash is coming from operations? Non cash WC growing? Justified by sales (IS)? Dividend? Steady? What fraction of income? Investment relative to depreciation:

Larger (hence growing) About the Same (stable) Smaller (blowdown of assets)

Financing Locking in or paying back long term debt? Issuing or buying back shares? Common or preferred?

Operational vs. Financial Management

All businesses require that management address two areas: Operational health: does our underlying business activity create Value independent of how we finance the business?

Financial health: have we raised money in a way that can sustain the business?

Income Statement is the primary source of evidence of operational health

Contribution Margin is a critical measure Balance Sheet is the primary source of evidence of financial health

Working Capital is an important measure Statement of Cash Flow is a link between Income Statements &

Balance Sheets

Importance of Statement of Cash Flows

Information on firm’s sources of cash Estimate liquidity position of the company Ability to meet expected payments How the company should finance its cash needs Reconciliation of net income with cash – analysis of

earnings quality Assess possible problems of company in meeting its

debt payments

Discussion Question

CFS is a very favorite statement for analyst, Why?