Case #2: Statements of Cash Flows

Executive Summary

The three companies’ Statements of Cash Flows for Alpha, Beta, and Gamma give

detailed insight to the operating, investing, and financing activities of each. The contents of

these cash flow statements give a comprehensive overview of the firm’s generation and

utilization of funds. Statements of Cash Flows provide real-time information on the critical

internal mechanisms that distribute cash. From analysis of the companies’ Statement of

Cash Flows and by calculating the percent change from year to year, the cash distribution

trends are easily identifiable. All of the companies are in different financial situations which

is shown in the excel spreadsheet and reemphasized in the analysis section.

Questions for each of the years on the Statements of Cash Flows:

1. What were the firm’s major sources of cash? Its major uses of cash?
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.
3. Was the firm able to generate enough cash from operations to pay for all of its
capital expenditures?
4. Did the cash flow from operations cover both the capital expenditures and the
firm’s dividend payments, if any?
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?
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?
8. What other major items affect cash flows?
What was the trend in:
9. Net income?
10. Cash flow from (continuing) operations?
11. Capital expenditures?
12. Dividends?
13. Net borrowing (proceeds less payments of short - and long - term debt)?
14. Working capital accounts?
1
 15. Based on the evidence in the Statement of Cash Flows alone, what is
your assessment of the
16. Financial strength of this business? Why?

Alpha Company 1989

1. The firm’s major sources of cash are from long-term debt and short-term borrowing.
The major uses of cash are investments in depreciable assets and long-term debt.
2. Cash flows from operations is greater than net income because of
a. Depreciation: This is added back to net income because it is not a source of
cash inflow or cash outflow
b. Restructuring and other unusual items: This is added back because it does
not affect the amount of cash.
3. The corporation was unable to to generate enough cash to pay for all of its
capital expenditures.
4. The cash flow from operations did not cover the capital expenditures and the
firm’s dividend payments.
5. The firm did not have the ability to invest its excess cash.
6. The sources of cash used were proceeds from long-term debt, short-term borrowing,
and proceeds from disposal of depreciable and other assets.
7. The working capital accounts were primarily users of cash.
8. Other items that affect cash flows are proceeds from sale of common stock, purchase
of treasury stock, and changes in foreign exchange rates.

Alpha Company 1990

1. The sources of cash are sale of discontinued operations and disposal of depreciable
and other assets. The major uses of cash are payment of long-term debt and short-term
borrowing.
2. Cash from operations is greater than net income because of:
a. Deprecation: This is added back to net income because it is not a source of
cash inflow or cash outflow.
b. Inventory: This increase is because of sales of inventory.
c. Accounts receivable: The accounts receivable decreased which means
we received cash.
d. Restructuring and other unusual items: This reduces net income but it has
no effect on cash.
3. Cash from operating activities was insufficient to cover capital expenditures.
4. The cash flow from operations did not cover the capital expenditures and the
firm’s dividend payments.
5. The firm did not have the ability to invest its excess cash.
6. The sources of cash used were proceeds from disposal of depreciable and other
assets and proceeds from the sale of discontinued operations.
 7. The working capital accounts were primarily sources of cash.
8. Other items that affect cash flows are proceeds from sale of common stock
and proceeds from long-term debt.

Alpha Company 1991

1. The major sources of cash are proceeds from disposal of depreciable and other
assets, accounts receivable, and proceeds from the sale of discontinued operations.
The major uses of cash are payments of long-term debt, investments in depreciable
assets, payment of current liabilities, and investment in capitalized software.
2. Cash from operations is greater than net income because:
a. Deprecation: This is added back to net income because it is not a source of
cash inflow or cash outflow.
b. Amortization of capitalized software: The generation of cash flows from
the purchase of the capitalized software.
c. Restructuring and other unusual items: This reduces net income but it has
no effect on cash.
d. Accounts receivable: The accounts receivable decreased which means
we received cash.
e. Inventory: This increase is because of sales of inventory.
3. Cash from operating activities was insufficient to cover capital expenditures.
4. The cash flow from operations did not cover the capital expenditures and the
firm’s dividend payments.
5. The firm did not have the ability to invest its excess cash.
6. The sources of cash used were proceeds from disposal of depreciable and other
assets and proceeds from the sale of discontinued operations.
7. The working capital accounts were primarily sources of cash.
8. Other items that affect cash flows are proceeds from sale of common stock
and proceeds from long-term debt.
Alpha Corporation Trends

1. Net income: Alpha Corporation has substantial losses in net income from the years
1989-1991. Total losses for the three years are about 1,322 million, averaging to about 440.67
million in losses. There is no concrete trend in these figures, as net income dropped 94% from
1989 to 1990, whereas earnings in 1991 were about 39% higher than in 1990. It is clear that the
net income number is not the best benchmark number to look at for this firm, because of its
volatility in both directions.
2. Cash flow from continuing operations: Cash flow from continuing operations grew
steadily in the three years, indicating a positive trend for the continuing business. On an
annualized basis, the firm increased its cash provided by continued operations by about
16.3%.
3. Capital Expenditures: This number is best reflected in the company’s investment in
depreciable assets plus its investment in software. This makes the total for 1989-1991
363.1, 217.5, and 157.5 respectively. This is a clear downward trend in capital expenditures.
4. In 1989 the company paid out 26 million in dividends, followed by a 7.2 million dividend
in 1990, a 72% decrease. In 1991, the firm paid no dividends, indicating unlikely future
dividends from continuing operations.
5. Net borrowing for years 1989-1991 are 353.1, -599.7, and -85.1. The trend is downward,
but that is because the company funded and then paid off the debt in subsequent years.
Future positive net borrowing is probably expected if capital is needed.
6. Working capital: Cash from working capital changes from the years 1989-1991 are
-30.7, 165.9, and 169.5. This is an upward trend and as the restructuring is finished. The
company might have to fund working capital in the next coming years, which would cause a
decrease in cash provided by working capital items.
easonable 21.5% from the years 1990-1991. This level of growth is more reasonable, and
should be more in line with expectations going forward.
1. Cash flow from continuing operations: Cash flow from operations averaged 4,863 from the
years 1989-1991. 1990 saw a big spike in this number with 7,000, and then came back down
to 3,919 in 1991. This number is volatile, but can be reasonably predicted around a 4,000 level.
2. Capital Expenditures: Capital Expenditures experienced an annualized 18.2% growth in
capital expenditures from the years 1989-1991. This is a clear trend upward and
expectations should stay in line with the annualized number keeping in mind the relative
growth of the company.
3. Dividends: This firm pays no dividends.
4. Net borrowing: Net borrowing for the years 1989-1991 respectively are 3,152, -2,126, and
-5,985. These numbers were calculated by taking the number in net cash provided or used in
financing activities and subtracting proceeds from the issuance of common stock and adding
back principal payments under capital lease obligations. There is a trend here towards debt
repayment.
5. Working capital accounts: Total adjustments in working capital from the years 1989-
1991 were 3898, -1,367, and -6,796. This is a trend towards working capital funding.
Financial Strength:

Alpha Company

The financial strength of this company is increasing. Alpha company sees annual losses
in net income, however, their net cash received from operating activities is increasing.
They are selling their depreciable assets to help pay their new depreciable assets. In
1990 they did pay a considerable amount of long-term debt, however in 91 the amount
paid was considerably lower.