Analysis of Cash Flow Statement

Alpha Company

Year-1989

1 For each of the years on the Statement of Cash Flows:

1. What was the firm’s major sources of cash? Its major use of cash?
Major sources of cash are proceeds from long-term debt and short term borrowings.
Major uses of cash would be investment in depreciable assets and payments of long-
term debt
2. Was cash flow from operations greater than or less than net income? Explain in detail
the major reasons for the difference between these two figures
Cash from operations is greater than that from net income. The increase in net
operating cash can be accounted to:
 Depreciation:- The value is subtracted in net income, but not from cash as it
does not result in any cash
 Restructuring and other unusual item:- This reduces the net income, however it
doesn’t affect the net cash
3. Was the firm able to generate enough cash from operations to pay for all capital
expenditures?
The firm was not able to generate enough cash from operations to fund its capital
expenditures
4. Did the cash flow from operations cover both the capital expenditures and firm’s
dividend payment, if any?
The firm was not able to generate enough cash from operations to fund its capital
expenditures and dividend payments
5. If it did, how did the firm invest its excess cash?
6. If not, what were the sources of cash the firm used to pay for the capital expenditures
and/or dividends?
Sources of cash used to pay for capital expenditures and/or dividends are proceeds from
long-term debt and short term borrowings.
7. Were the working capital (current asset and current liability) accounts other than cash
and cash equivalents primarily sources of cash, or users of cash?
Net working capital account is primarily a source of cash.
8. What other items affected cash flow?
The purchase of treasury stocks and effect of changes in foreign exchange are other
users of cash.

Year-1990

I For each of the years on the Statement of Cash Flows:

1. What were the firm’s major sources of cash? Its major use of cash?
Major sources of cash are sale of discontinued operations and disposal of depreciable
and other assets.Major uses of cash would be payments of long-term debt and short-
term borrowings
 2. Was cash flow from operations greater than or less than net income? Explain in detail
the major reasons for the difference between these two figures
Cash from operations is greater than that from net income. The increase in net
operating cash can be accounted to:
 Depreciation:- The value is subtracted in net income, but not from cash as it
does not result in any cash
 Inventory:- The adjustment of inventory also increases the net cash from
operations in comparison to net income. This increase is because of sales of
inventory which was created before the current period.
 Accounts Receivable:- The adjustment of accounts receivable also increases the
net cash from operations in comparison to net income. This increase is because
of payments of accounts receivable existing towards that in opening balance.
 Restructuring and other unusual item:- This reduces the net income, however it
doesn’t affect the net cash
3. Was the firm able to generate enough cash from operations to pay for all capital
expenditures?
The firm was not able to generate enough cash from operations to fund its capital
expenditures
4. Did the cash flow from operations cover both the capital expenditures and firm’s
dividend payment, if any?
The firm was not able to generate enough cash from operations to fund its capital
expenditures and dividend payments
5. If it did, how did the firm invest its excess cash?
6. If not, what were the sources of cash the firm used to pay for the capital expenditures
and/or dividends?
Sources of cash used to pay for capital expenditures and/or dividends are proceeds from
long-term debt and that of sales of depreciable assets and discontinued operations
7. Were the working capital (current asset and current liability) accounts other than cash
and cash equivalents primarily sources of cash, or users of cash?
Net working capital account is primarily an user of cash.
8. What other items affected cash flow?
The purchase of treasury stocks and effect of changes in foreign exchange are other
users of cash.

Year-1991

I For each of the years on the Statement of Cash Flows:

1. What was the firm’s major sources of cash? Its major use of cash?
Major sources of cash are proceeds from disposal of depreciable and other assets and
cash from operating expenses. Major uses of cash would be payments of long-term
debt and investment in depreciable assets.
2. Was cash flow from operations greater than or less than net income? Explain in detail
the major reasons for the difference between these two figures
Cash from operations is greater than that from net income. The increase in net
operating cash can be accounted to:
  Depreciation:- The value is subtracted in net income, but not from cash as it
does not result in any cash
 Inventory:- The adjustment of inventory also increases the net cash from
operations in comparison to net income. This increase is because of sales of
inventory which was created before the current period.
 Accounts Receivable:- The adjustment of accounts receivable also increases the
net cash from operations in comparison to net income. This increase is because
of payments of accounts receivable existing towards that in opening balance.
 Restructuring and other unusual item:- This reduces the net income, however it
doesn’t affect the net cash
3. Was the firm able to generate enough cash from operations to pay for all capital
expenditures?
The firm was not able to generate enough cash from operations to fund its capital
expenditures
4. Did the cash flow from operations cover both the capital expenditures and firm’s
dividend payment, if any?
The firm was not able to generate enough cash from operations to fund its capital
expenditures and dividend payments
5. If it did, how did the firm invest its excess cash?
6. If not, what were the sources of cash the firm used to pay for the capital expenditures
and/or dividends?
Sources of cash used to pay for capital expenditures and/or dividends are proceeds from
long-term debt and that of sales of depreciable assets and discontinued operations
7. Were the working capital (current asset and current liability) accounts other than cash
and cash equivalents primarily sources of cash, or users of cash?
Net working capital account is primarily a source of cash.
8. What other items affected cash flow?
The purchase of treasury stocks and effect of changes in foreign exchange are other
users of cash.

Trends
1. Net income
We can see that the net income is showing an increasing trend after the dip in the
previous year.
2. Cash Flow from (continuing) operation

The cash flow from operations is continuously increasing from 1989-1991

3. Capital Expenditure

The capital expenditure of the company is decreasing from 1989-1991

4. Dividend
The dividend has been decreasing continuously for the previous three years.
5. Net Borrowing
The net borrowing of the company is increasing from a dip in the previous year.
 6. Working Capital Account
The working capital of the company is showing a increasing trend after the dip in the
previous year.

III
As we can see from the statement of cash flows, the net income is increasing every year.
Also, the cash flow from operating activities is increasing. The capital expenditure of the
company is decreasing which means the company is becoming more stable. Also, the
working capital of the company is increasing. Though the net borrowing of the company
has increased, since net cash flow has increased the overall picture of the company
seems to be healthy.

Exhibit 1-Beta Corporation

Year-1989

1 For each of the years on the Statement of Cash Flows:

1 What was the firm’s major sources of cash? Its major use of cash?
The major source of cash is Proceeds of subordinated debts and Cash from operating
activities.
The major use of cash is towards Capital Expenditure
2. Was cash flow from operations greater than or less than net income? Explain in detail
the major reason for difference between these two figures?
Cash flow from operations was greater than that from net income. This is because a
major chunk of the increase in net income can be attributed to:
 Depreciation and amortization: This value is deducted from net income, but not
from net cash as it does not result in any cash flow.
 Decrease in Inventory: The decrease in inventory is not marked in net income as
this value was already accounted in a previous financial year. But the cash
arising out of this transaction was realized only in this financial year. Hence, it
results in an increase in net cash.
 Similarly, a payment towards accounts payable and accrued expenses for a
previous year results in an increase in net cash, but does not change the net
income.
3. Was the firm able to generate enough cash from operations to pay for all capital
expenditures?
Since the net cash from operating activities accounted to $3670 mn while the capital
expenditure was $3650 mn. , the cash from operating income was sufficient to fund the
capital expenditure.

4. Did the cash flow from operations cover both the capital expenditures and firm’s
dividend payment, if any?
 Yes, the cash flow from operations cover both capital expenditures and firm’s dividend
payments.
5. If it did, how did the firm invest its excess cash?
The excess cash can be used for payments towards working line, equipment line or
capital lease obligations.
6. If not, what were the sources of cash the firm used to pay for the capital expenditures
and/or dividends?
7. Were the working capital (current assets and current liability) accounts other than cash
and cash equivalents primarily sources of cash, or users of cash?
The working capital accounts other than that of cash and cash equivalents are primarily
users of cash.

8. What other major items affected cash flow?

The other major sources of cash were proceeds from issuance of common stock.
Similarly, the other major users of cash were net payments towards working capital line
and equipment line of credit. Similarly, payments towards capital lease obligations is
also an user of cash.

Year-1990

I For each of the years on the Statement of Cash Flows:

1. What was the firm’s major sources of cash? Its major use of cash?
The major source of cash is Cash from operating activities.
The major use of cash is towards Capital Expenditure
2. Was cash flow from operations greater than or less than net income? Explain in detail the
major reason for difference between these two figures?
Cash flow from operations was greater than that from net income. This is because a
major chunk of the increase in net income can be attributed to:
 Depreciation and amortization: This value is deducted from net income, but not
from net cash as it does not result in any cash flow.
3. Was the firm able to generate enough cash from operations to pay for all capital
expenditures?
Since the net cash from operating activities accounted to $7000 mn while the capital
expenditure was $4600 mn. , the cash from operating income was sufficient to fund the
capital expenditure.

4. Did the cash flow from operations cover both the capital expenditures and firm’s dividend
payment, if any?
Yes, the cash flow from operations cover both capital expenditures and firm’s dividend
payments.
5. If it did, how did the firm invest in excess cash?
 The excess cash can be used for payments towards working line, equipment line or
capital lease obligations. In fact the excess cash is sufficient for payment towards all
these financing activities.
6. If not, what were the sources of cash the firm used to pay for the capital expenditures
and/or dividends?
7. Were the working capital (current assets and current liability) accounts other than cash and
cash equivalents primarily sources of cash, or users of cash?
The working capital accounts other than that of cash and cash equivalents are primarily
users of cash.
8. What other major items affected cash flow?
The other major sources of cash were proceeds from issuance of common stock.
Similarly, the other major users of cash were net payments towards working capital line
and equipment line of credit. Similarly, payments towards capital lease obligations is
also an user of cash.

Year-1991

I For each of the years on the Statement of Cash Flows:

1. What was the firm’s major sources of cash? Its major use of cash?
The major source of cash is Proceeds from the issuance of common stock.
The major use of cash is towards purchases for marketable securities and capital
expenditures.
2. Was cash flow from operations greater than or less than net income? Explain in detail the
major reason for difference between these two figures?
Cash flow from operations was less than that from net income. The major reason for the
difference between net income and net cash can be attributed to:
 Depreciation and amortization: This value is deducted from net income, but not
from net cash as it does not result in any cash flow.
 Increase in accounts receivable: As a major part of the net income is realized as
accounts receivable, the net income increases, but cash flow does not change.
3. Was the firm able to generate enough cash from operations to pay for all capital
expenditures?
Since the net cash from operating activities accounted to $3919 mn while the capital
expenditure was $6031 mn. , the cash from operating income was insufficient to fund
the capital expenditure.

4. Did the cash flow from operations cover both the capital expenditures and firm’s dividend
payment, if any?
No, the cash flow from operations was insufficient to cover capital expenditures and
firm’s dividend payments.
5. If it did, how did the firm invest in excess cash?
6. If not, what were the sources of cash the firm used to pay for the capital expenditures
and/or dividends?
 The capital expenditures were funded from proceeds of issuances of common stock.
7. Were the working capital (current assets and current liability) accounts other than cash and
cash equivalents primarily sources of cash, or users of cash?
The working capital accounts other than that of cash and cash equivalents are primarily
users of cash.
8. What other major items affected cash flow?
The other major sources of cash were proceeds from issuance of common stock.
Similarly, the other major users of cash was payments towards capital lease obligations.
Similarly, net payments towards working capital line and equipment line of credit is also
an user of cash.

II What was the trend in:

9. Net income
The net income is showing a consistent increasing trend as the income is increasing from
1989 to 1991 (from $417 to $6323).
10. Cash Flow from (continuing) operations
The cash flow from operations is showing a decreasing trend after an increasing trend in
the previous year(1990)
11. Capital Expenditures
The capital expenditure of the firm is increasing which indicates that the firm is increasing
more funds to the purchase of fixed-assets
12. Dividends
As the company has not provided any dividends till now, it is not possible to assess the
trend for dividends
13. Net Borrowings
The net borrowings is showing an increasing trend after a dip in the previous year
14. Working Capital Accounts
The working capital of the company is showing a consistent increasing trend.

III Based on the evidence of Statement of Cash Flows, what is your assessment of the financial
strength of the business? Why?

The net income of the business is increasing and this shows that the firm is increasing its
foothold in the business. The cash flow from operating expenses is showing a decrease in
comparison to the previous year. However, the cash received from customers is showing a
consistent increase. The decrease in cash flow from operations can be mainly attributed to higher
income tax and cash paid to suppliers and employees. Since, this increase can lead to higher source
of revenue in future the decrease in cash flow from operations is not worrisome.

The capital expenditures of the company is also increasing. This shows that the company is
investing heavily in fixed assets which will lead to an increase in production capacity. As for net
borrowings it has shown a huge increase over the previous years and this increase is mainly funded
by issuance of new stocks. As far as whether the source of funding is sustainable depends on the
future net income and dividends paid by the company. The working capital of the company is
showing an increasing trend. This is a healthy sign as the excess cash with a company would
increase as the working capital increases.

Thus based on the evidence of statement of cash flows, the outlook of the company seems
healthy.

Gamma Company

Year-1989

I For each of the years on the Statement of Cash Flows:

1. What was the firm’s major sources of cash? Its major use of cash?
Major Sources of Cash- Cash from Operating Activities, Proceeds from Issuance of debts and
issuance of treasury shares, including tax benefits
Major Uses of Cash- Purchase of plant, property, and equipment, Increase in other assets, Payments
to retire debt and Purchase of treasury shares
2. Was cash flow from operations greater than or less than net income? Explain in detail
the major reason for difference between these two figures?

Cash flow from operations was greater than that from net income. The major reason for
the difference between net income and net cash can be attributed to:
 Depreciation and amortization: This value is deducted from net income, but not
from net cash as it does not result in any cash flow.
 Increase in Deferred Revenue and customer advances
3. Was the firm able to generate enough cash from operations to pay for all capital
expenditures?
The cash from operating income was sufficient to fund the capital expenditure.
4. Did the cash flow from operations cover both the capital expenditures and firm’s
dividend payment, if any
The cash from operating income was sufficient to fund the capital expenditure and
dividend payments.
5. If it did, how did the firm invest in excess cash?
The excess cash could be used for funding a portion of payments of increase of other
assets, Payments to retire debt or Purchase of treasury shares.
6. If not, what were the sources of cash the firm used to pay for the capital expenditures
and/or dividends?
7. Were the working capital (current assets and current liability) accounts other than cash
and cash equivalents primarily sources of cash, or users of cash?
The working capital was primarily users of cash
8. What other major items affected cash flow?
The other major items affecting cash flow are: proceeds from issuance of debt, purchase
of treasury shares and issuance of treasury shares.

Year-1990
 I For each of the years on the Statement of Cash Flows:
1. What was the firm’s major sources of cash? Its major use of cash?
Major Sources of Cash- Cash from Operating Activities, Proceeds from Issuance of debts and
issuance of treasury shares, including tax benefits
Major Uses of Cash- Purchase of plant, property, and equipment, Increase in other assets, Payments
to retire debt and Purchase of treasury shares
2. Was cash flow from operations greater than or less than net income? Explain in detail
the major reason for difference between these two figures?
Cash flow from operations was greater than that from net income. The major reason for
the difference between net income and net cash can be attributed to:
 Depreciation and amortization: This value is deducted from net income, but not
from net cash as it does not result in any cash flow.
 Increase in Deferred Revenue and customer advances
 Increase in restructuring reserve
 Increase in other liabilities
3. Was the firm able to generate enough cash from operations to pay for all capital
expenditures?
The cash from operating income was sufficient to fund the capital expenditure.
4. Did the cash flow from operations cover both the capital expenditures and firm’s
dividend payment, if any
The cash from operating income was sufficient to fund the capital expenditure and
dividend payments.
5. If it did, how did the firm invest in excess cash?
The excess cash could be used for funding a portion of payments of increase of other
assets, Payments to retire debt or Purchase of treasury shares.
6. If not, what were the sources of cash the firm used to pay for the capital expenditures
and/or dividends?
7. Were the working capital (current assets and current liability) accounts other than cash
and cash equivalents primarily sources of cash, or users of cash?
The working capital was primarily users of cash
8. What other major items affected cash flow?
The other major items affecting cash flow are: proceeds from issuance of debt, purchase
of treasury shares and issuance of treasury shares and increase in restructuring reserve.

Year-1991

I For each of the years on the Statement of Cash Flows:

7. What was the firm’s major sources of cash? Its major use of cash?
Major Sources of Cash- Cash from Operating Activities, Proceeds from Issuance of debts and
issuance of treasury shares, including tax benefits
Major Uses of Cash- Purchase of plant, property, and equipment, Increase in other assets, Purchase
of Kienzle business Payments to retire debt and Purchase of treasury shares
8. Was cash flow from operations greater than or less than net income? Explain in detail
the major reason for difference between these two figures?
 Cash flow from operations was greater than that from net income. The major reason for
the difference between net income and net cash can be attributed to:
 Depreciation and amortization: This value is deducted from net income, but not
from net cash as it does not result in any cash flow.
 Increase in Deferred Revenue and customer advances
 Increase in restructuring reserve
 Increase in other liabilities
9. Was the firm able to generate enough cash from operations to pay for all capital
expenditures?
The cash from operating income was sufficient to fund the capital expenditure.
10. Did the cash flow from operations cover both the capital expenditures and firm’s
dividend payment, if any
The cash from operating income was sufficient to fund the capital expenditure and
dividend payments.
11. If it did, how did the firm invest in excess cash?
The excess cash could be used for funding a portion of payments of increase of other
assets, purchase of Kienzle business, Payments to retire debt or Purchase of treasury
shares.
12. If not, what were the sources of cash the firm used to pay for the capital expenditures
and/or dividends?
13. Were the working capital (current assets and current liability) accounts other than cash
and cash equivalents primarily sources of cash, or users of cash?
The working capital was primarily a source of cash
14. What other major items affected cash flow?
The other major items affecting cash flow are: proceeds from issuance of debt,purchase
of Kienzle business, purchase of treasury shares and issuance of treasury shares and
increase in restructuring reserve.

II Trends
15. Net income
We can see that the net income is continuously decreasing from 1989-1991( from
$1479391 to $1040901)
16. Cash Flow from (continuing) operation

The cash flow from operations is continuously decreasing from 1989-1991

17. Capital Expenditure

The capital expenditure of the company is increasing

18. Dividend
No dividend has been provided till now.
19. Net Borrowing
The net borrowing of the company is increasing from a dip in the previous year.
20. Working Capital Account
The working capital of the company is showing a decreasing trend.
III
As we can see from the statement of cash flows, the net income is decreasing every
year. Also, the cash flow from operating activities is decreasing. This is a major cause of
concern. The capital expenditure of the company is also increasing and this is mainly
funded by borrowings.( net borrowing is increasing). Also, the working capital of the
company is decreasing. This means that the company is going through a negative cycle
as most of the indicators have a negative trend. Hence, the company needs to take stock
of things and must have a clear plan in future.