Chemalite, Inc.

(B)
 Balance Sheet as at Dec 31, 1991 and 1992
Remarks
31-Dec-91 31-Dec-92
Assets
Cash 113,000 9,490
Accounts receivable 69,500 139,530
Inventories - raw material 55,000 75,450 Average stock
To give required service to wholesalers
Inventories - finished goods 104,680 Includes $5,000 of depreciation
Prepaid insurnace 65,000 Insurnace $97,500 (July 92 - Dec 93)
New building is $600,000 / 10 yrs / SLM / half in cash
Old machine sold for $215,500
Property, planty and equipment 212,500 1,120,000 Cost of new machine $520,000
Accumulated depreciation -10,625 -56,000
Land 250,000 Land added for new production facility / half in cash
Patent 100,000 75,000
Total assets 539,375 1,783,150

Liabilities and Owners' Equity

Taxes payable 10,900 9,950
ST debt 200,000 Matter of concern?
Deferred income taxes 26,730
Notes payable (10% ) 425,000 Towards EMI from June 30, 1994
Long-term debt (10% ) 510,000 Loan effective June 30 at 10% paid annually
1991 Dividend paid in Jan 1992 $0.02
Dividends payable 10,000 12,000 Dividend payable in 1992: 10% of net income
Common stock 500,000 500,000
Retained Earnings 18,475 125,470
Treasury stock -26,000 Repurchased 20,000 @ $1.30 per sahre
Total liabilities and owners' equity 539,375 1,783,150
 Income Statement for the Years Ended Dec 31, 1991 and 1992
Remarks
31-Dec-91 31-Dec-92
Sales 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 expenses
Labor -275,000 -660,000 Looks like cash expenses
Rent -50,000 -25,000 Looks like cash expenses
Utilities -30,000 -82,000 Looks like cash expenses
Depreciation -10,625 -61,625
Gross margin 193,875 604,925
Advertising -22,500 -70,000 Looks like cash expenses
Research and development -63,250 Looks like cash expenses
Insurance -32,500 Looks like cash expenses
Amortization of patent -25,000 -25,000
Selling and administration expenses -75,000 -195,750 Looks like cash expenses
Gain on sale of equipment 24,250
Interest expenses -750 -58,750 Looks like cash expenses
Protypes -23,750
Legal fees -7,500
Income before taxes 39,375 183,925 400% increase?
Income taxes -10,900 -64,930
Net income 28,475 118,995
 CF Inven Inven Prep Accum Taxes ST Deffer Notes LT Divid Com m Ret Treasur
Entry No. Details Type Cash AR RM FGs Insur PPE Land Patent Depre Payab Debt IT Payab Debt Payab Stock Earn Stock
Opening balance sheet 113,000 69,500 55,000 212,500 100,000 10,625 10,900 10,000 500,000 18,475
1 Sales on credit 1,886,250 1,886,250
1 Cash collected from customers O 1,816,220 -1,816,220
2 Raw material consumed -452,700 -452,700
2 Raw material added O -473,150 473,150
3 Finished goods inventory O -99,680 99,680
4 Insurance exp / prepaid O -97,500 65,000 -32,500
5 Land and Building bought I -425,000 600,000 250,000 425,000
5 Depreciation on the machine sold 10,625 -10,625
5 Old machine sold I 215,500 -212,500 -21,250 24,250
5 New machine bought I -520,000 520,000
5 Depreciation for building 25,000 -25,000
5 Depreciation for new machine 26,000 -26,000
5 Depreciation on inventory 5,000 5,000
6 Income taxes payable O -38,200 26,730 -64,930
6 Income tax paid O -950 -950
7 Short term debt F 200,000 200,000
7 LT Secured loan F 510,000 510,000
8 Dividend paid in Jan 2002 F -10,000 -10,000
8 Dividend declared 2002 12,000 -12,000
9 Shares repurchased F -26,000 -26,000
10 Labor O -660,000 -660,000
11 Rent O -25,000 -25,000
12 Utilities O -82,000 -82,000
13 Advertising O -70,000 -70,000
14 Research and development O -63,250 -63,250
15 Amortization of patent -25,000 -25,000
16 Selling and Administrative exp O -195,750 -195,750
17 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 -26,000
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 -26,000
1,839,150 1,839,150
 Cash Flow from Operating Activities
Cash collected from customers 1,816,220
Raw material added -473,150
Finished goods inventory -99,680
Insurance exp / prepaid -97,500
Income taxes payable -38,200
CFS – Direct Method Income tax paid
Labor
-950
-660,000
Rent -25,000
Utilities -82,000
Advertising -70,000
Research and development -63,250
Selling and Administrative exp -195,750
Interest exp -58,750
Net cash from operating activities -48,010
Cash Flows from Investing Activities
Land and Building bought -425,000
Old machine sold 215,500
New machine bought -520,000
Net cash from investing activities -729,500
Cash Flows from Financing Activities
Short term debt 200,000
LT Secured loan 510,000
Dividend paid in Jan 2002 -10,000
Shares repurchased -26,000
Net cash from financing activities 674,000
Net decrease in cash -103,510
Cash at beginning of year 113,000
Cash at the end of the year 9,490
 CFS – Indirect Method
Balance Sheet as at Dec 31, 1991 and 1992
31-Dec-91 31-Dec-92 Changes Type Remarks OCF ICF FCF
Assets
Cash 113,000 9,490 -103,510 118,995
Accounts receivable 69,500 139,530 70,030 CA Decreases cash -70,030
Inventories - raw material 55,000 75,450 20,450 CA Decreases cash -20,450
Inventories - finished goods 104,680 104,680 CA Decreases cash to the extent of $99,680 -99680
Prepaid insurnace 65,000 65,000 CA Decreases cash -65,000
I Dep: $61, 625, CG: 24,250
Property, planty and equipment 212,500 1,120,000 907,500 NCE; NOR Building: $600,000; Equip: 520,000; Equip sold: $215,500 -24,250 -517000
Accumulated depreciation -10,625 -56,000 -45,375 NCE Dep: $61, 625 61625
Land 250,000 250,000 I Newly bought -212500
Patent 100,000 75,000 -25,000 NCE Amortization 25,000
Total assets 539,375 1,783,150 1,243,775

Liabilities and Owners' Equity

Taxes payable 10,900 9,950 -950 CL Decreases cash -950
ST debt 200,000 200,000 F Increases cash 200,000
Deferred income taxes 26,730 26,730 CL Increases cash 26,730
Notes payable (10% ) 425,000 425,000
Long-term debt (10% ) 510,000 510,000 F 510,000
Dividends payable 10,000 12,000 2,000 F Dividend paid: $10,000 -10000
Common stock 500,000 500,000 0
Retained Earnings 18,475 125,470 106,995 Net Income 1992 = $106,995 + $12,000
Treasury stock -26,000 -26,000 F Decreases cash -26,000
Total liabilities and owners' equity 539,375 1,783,150 1,243,775
-48,010 -729,500 674,000
 CF Ret
Entry No. Details Type Cash Earn OCF
Opening balance sheet 113,000 18,475 118,995
1 Sales on credit 1,886,250

CFS
1 Cash collected from customers O 1,816,220 -70,030
2 Raw material consumed -452,700
2 Raw material added O -473,150 -20,450
Indirect Method 3
4
Finished goods inventory
Insurance exp / prepaid
O
O
-99,680
-97,500 -32,500
-99,680
-65,000
5 Land and Building bought I -425,000
5 Depreciation on the machine sold -10,625 10,625
5 Old machine sold I 215,500 24,250 -24,250
5 New machine bought I -520,000
5 Depreciation for building -25,000 25,000
5 Depreciation for new machine -26,000 26,000
5 Depreciation on inventory
6 Income taxes payable O -38,200 -64,930 26,730
6 Income tax paid O -950 -950
7 Short term debt F 200,000
7 LT Secured loan F 510,000
8 Dividend paid in Jan 2002 F -10,000
8 Dividend declared 2002 -12,000
9 Shares repurchased F -26,000
10 Labor O -660,000 -660,000
11 Rent O -25,000 -25,000
12 Utilities O -82,000 -82,000
13 Advertising O -70,000 -70,000
14 Research and development O -63,250 -63,250
15 Amortization of patent -25,000 25,000
16 Selling and Administrative exp O -195,750 -195,750
17 Interest exp O -58,750 -58,750
Close BS 9,490 125,470
Close BS 9,490 125,470
Income 118,995 -48,010
Analysis
Balance Sheet as at Dec 31, 1991 and 1992 VCS HCS
31-Dec-91 31-Dec-92 31-Dec-91 31-Dec-92 31-Dec-91 31-Dec-92
Assets
Cash 113,000 9,490 21 1 100 8
Accounts receivable 69,500 139,530 13 8 100 201
Inventories - raw material 55,000 75,450 10 4 100 137
Inventories - finished goods 104,680 6
Prepaid insurnace 65,000 4
Property, planty and equipment 212,500 1,120,000 39 63 100 527
Accumulated depreciation -10,625 -56,000 -2 -3 100 527
Land 250,000 14
Patent 100,000 75,000 19 4 100 75
Total assets 539,375 1,783,150 100 100 100 331

Liabilities and Owners' Equity

Taxes payable 10,900 9,950 2 1 100 91
ST debt 200,000 11
Deferred income taxes 26,730 1
Notes payable (10% ) 425,000 24
Long-term debt (10% ) 510,000 29
Dividends payable 10,000 12,000 2 1 100 120
Common stock 500,000 500,000 93 28 100 100
Retained Earnings 18,475 125,470 3 7 100 679
Treasury stock -26,000 -1
Total liabilities and owners' equity 539,375 1,783,150 100 100 100 331
Analysis
Income Statement for the Years Ended Dec 31, 1991 and 1992 VCS HCS
31-Dec-91 31-Dec-92 31-Dec-91 31-Dec-92 31-Dec-91 31-Dec-92
Sales 754,500 1,886,250 100 100 100 250
Material -195,000 -452,700 -26 -24 100 232
Labor -275,000 -660,000 -36 -35 100 240
Rent -50,000 -25,000 -7 -1 100 50
Utilities -30,000 -82,000 -4 -4 100 273
Depreciation -10,625 -61,625 -1 -3 100 580
Gross margin 193,875 604,925 26 32 100 312
Advertising -22,500 -70,000 -3 -4 100 311
Research and development -63,250 -3 100
Insurance -32,500 -2 100
Amortization of patent -25,000 -25,000 -3 -1 100 100
Selling and administration expenses -75,000 -195,750 -10 -10 100 261
Gain on sale of equipment 24,250 1 100
Interest expenses -750 -58,750 0 -3 100 7833
Protypes -23,750 -3
Legal fees -7,500 -1
Income before taxes 39,375 183,925 5 10 100 467
Income taxes -10,900 -64,930 -1 -3 100 596
Net income 28,475 118,995 4 6 100 418
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?