SUMMARY

John Stacey, a sales engineer for Aldhus Corporation is enrolled in an accounting class

that he takes in the evening. Due to a flight delay Stacey is afraid that he will miss his evening

class. In order to prepare for a quiz that might be given the next class, Stacey asked a fellow

classmate to send him the notes from that day’s class. When Stacey received the notes he began

to worry as he was not able to decipher the meaning of the notes. With this being said, Stacey

reached out to Professor Barnes for help to explain the Statement of Cash Flows. While meeting

with Stacey, Prof. Barnes decided the best way for Stacey to learn would be to examine Alpha,

Beta, and Gama companies cash flows and answering assigned questions.

ALPHA CORPORATION

In 1989 Alpha Company’s major sources of cash are proceeds from long-term debt and

short-term borrowings. The cash the company spends would be on investments in depreciated

assets and payments of long-term debt. The cash from the operations was greater than the net

income of the company. The increase of cash was in the accounts of depreciation. Unfortunately,

the firm didn’t generate enough cash for the capital expenditures or dividend payments. Since the

firm didn’t have enough cash on hand, they financed through debt and borrowings. There were

also purchases of treasury stock that affected the cash flow.

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 For the year of 1990 the major sources of cash are the sale of discontinued operations and

disposal of depreciated assets, and the major uses of cash would be payments of long-term debt

and borrowings. The cash flow from operations was greater than the net income. The increase in

cash came in the accounts of depreciation, inventory, and accounts receivable. Again, the firm

did not generate enough funds to pay for capital expenditures or dividends. So they financed

through long-term debt and depreciable assets. There were also purchases of treasury stock that

affected the cash flow.

In 1991 major sources of cash this year came from operating expenses and disposal of

depreciable assets. The firm’s uses of cash were in investments in depreciable assets and

payments of long-term debt. Again in 1991, the firm’s cash from operations was greater than net

income. The increase in cash came in depreciation, inventory and accounts receivable. The firm

didn’t have enough cash for capital expenditures so they financed through long-term debt and

sales of depreciable assets.

As one looks for trends in Alpha Corporation The net income is showing an increasing

trend after the falloff in the previous year. The cash flows from operations keep on increasing

from 1989, while the capital expenditure is decreasing from 1989-1991. Also, during those years

the dividend is decreasing. The net borrowing of the company is increasing from a dip in the

previous year, while the working capital is increasing.

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 BETA CORPORATION

In 1989 the major source of cash for Beta Corp. is proceeds of subordinate debts and cash

from operating activities and the major use of cash is capital expenditures. Cash flows from

operations was greater than net income due to depreciation, amortization, decrease in inventory

and payments towards accounts payable/accrued expenses. Cash from operating income was able

to fund capital expenditures. Beta Corporations operating income also covered the firm’s

dividend payments and the excess cash can be used to pay the working line, equipment line and

capital lease obligations. Working capital accounts other than cash/cash equivalents are primarily

users of cash. Other major sources of cash were proceeds from the issuing of common stock,

payments to working line, payments to equipment line and payments to capital lease obligations.

In 1990 the major source of cash for this year is cash from operating activities and the

major use of cash was towards capital expenditures. Cash from operations was greater than net

income and that is due to depreciation and amortization. Cash flow from operations covered

capital expenditures and firm’s dividend payments. Excess cash for 1990 went to working line,

equipment line and lease obligations. Working capital accounts other than cash/cash equivalents

are primarily users of cash. Other major sources of cash were proceeds from the issuing of

common stock, payments to working line, payments to equipment line and payments to capital

lease obligations.

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 In 1991 the major source of cash for this year is proceeds from the issuance of common

stock and major use of cash was for purchases for marketable securities and capital expenditures.

Cash flow from operations was less than net income due to an increase in accounts receivables.

This year operating expenses did not cover all capital expenditures. Instead capital expenditures

were funded by proceeds of issuance of new common stock. Working capital accounts other than

cash/cash equivalents are primarily users of cash. Other major sources of cash were proceeds

from the issuing of common stock, payments to working line, payments to equipment line and

payments to capital lease obligations.

Net Income is showing an increasing trend and cash flow from operating is showing a

decreasing trend from 1989-91. Capital Expenditures is continuously increasing which means the

firms funds are continuously increasing also. Net borrowing and working capital accounts are

both showing increasing trends.

GAMMA CORPORATION

As you examine all three years 1989, 1990 and 1991 everything seems to be the same

across the statement of cash flows. One can notice that for all three years the sources of cash

came from cash within operating activities, as well as, proceeds from issuance of debt alongside

the issuance of treasury shares. One can then notice that the uses of cash come from the

purchasing of property, plant, and equipment and also includes the attempt to retire debt by

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making payments and purchasing treasury shares. The cash flows from operation was greater

than that from net income over the three years, the difference could be because there was an

increase in other liabilities, as well as an increase in deferred revenue and customer advances.

The cash was from operating activities was big enough to cover both the capital

expenditure as well as the dividend payments. Excess cash was used to make payments to retire

debt, and could potentially be used to purchase more treasury shares. The working capital was

primarily users of cash, while other items that were affected by cash being the purchase of

treasury shares as well as the issuance of them. One can see that net income is decreasing over

the years as well as the cash flows from continuing operations. The capital expenditures are

increasing as well as the net borrowing of the company.

As one views the statement of cash flows provided by Gamma Corporation you can see

that the net income is decreasing yearly. In addition to this, you can see that the cash flows from

operating activities is decreasing as well which could cause a major concern for the company.

The capital expenditure of the company is increasing which is mainly funded by borrowings.

One can also notice that the company is going through a negative cycle as you can see that the

working capital of the company is decreasing as well as other indicators having a negative trend.

The company needs to make a clear plan for the future to conduct positive income.