“Devon Delight” (DD) is a firm that specialises in manufacturing organic chocolate.

Since
2011, DD has been expanding by making a series of sizeable acquisitions, financed by a mix
of new equity and high leverage from bank loans. By the end of 2014, the Chairman feels
able to comment in the Annual Report that “Our expansion strategy is now delivering
rewards to shareholders. Solid operating cash flow enables us to start paying back debt and
we are looking forward to paying dividends in the near future”.

Examine the five-year record below cash flow statements, and answer the following four
questions.

a) Which trends would the Chairman use to justify his statement?

b) What are most likely the most important events to have affected DD during
the period examined?

c) How would a critical investor comment on this statement?

Note: the corresponding revenues from the Income Statement are stated below:

201 201 201 201

0 1 2 2013 4
Revenue 125 180 224 221 196
CASH FLOW STATEMENTS
Cash Flow from Operations (CFO) 2010 2011 2012 2013 2014
Net Income 15 11 8 5 17
Depreciation 4 8 16 17 17
Loss (gain) on property sales 0 0 0 -8 -15
Rise (fall) in payables 15 28 32 8 22
Fall (rise) in receivables -24 -37 -45 101 120
Fall (rise) in inventories -35 -79 -54 -57 -89
Cash Flow from Operations -25 -69 -43 66 72

Cash Flow from Investing (CFI)

Payments for acquisitions 0 -135 -100 0 0
Payments for new equipment -3 -4 -5 -2 -5
Proceeds from property sales 0 0 0 63 105
Cash Flow from Investing -3 -139 -105 61 100

Cash Flow from Financing (CFF)

New debt 20 72 120 -21 -85
New equity issues 15 123 55 0 0
Dividends paid 0 0 0 0 0
Cash Flow from Financing 35 195 175 -21 -85
Change in cash 7 -13 27 106 87