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MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 6
CASH FLOW ANALYSIS
I. Questions
1. Purposes of the Statement of Cash Flows
a. To predict future cash flows
b. To evaluate management decisions
c. To determine the ability to pay dividends to shareholders and
interest and principal to creditors
d. To show the relationship of net income to changes in the
businesss cash.
. Comparative balance sheets present the financial position of the enterprise
at two points in time. The income statement for the period between the
two balance sheets describes how the income!producing activities affected
the financial position. "ecause cash flows from operating activities may
differ substantially from net income# and because numerous other
financing and investing activities have an impact on financial position# the
statement of cash flows is necessary. The statement emphasi$es changes
in the cash balances that result from changes in assets# liabilities and
e%uity accounts caused by operating# investing and financing activities.
&. The most important source of cash for many successful companies is from
operating activities. ' large positive operating cash flow is a good sign
because it means funds have been internally generated with no fi(ed
obligations or commitment to return such to anybody.
). It is possible for cash to decrease during a year when income is high
because cash may be used not only for operating activities but also for
investing and financing activities.
*. Transactions involving accounts payable are not considered to be
financing activities because such transactions are used to obtain goods
and services rather than to obtain cash. Furthermore# purchases of goods
and services relate to a companys day!to!day operating activities.
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Chat!" 6 Cash Flow Analysis
+. The loss is added bac, to net income to avoid double counting since the
entire proceeds from the sale -net boo, value minus loss on sale. will
appear as a cash inflow from investing activities.
/. Three categories of transactions that may result in increases in cash are
a. 0perating activities
b. Investing activities -e.g.# sale of investments or other assets..
c. Financing activities -e.g.# borrowing or sale of shares..
These activities are sources of cash when cash is increased as a result of
the particular activity.
1. Three categories of transactions that may result in decreases in cash are
a. 0perating activities
b. Investing activities -e.g.# purchase of investments or other assets..
c. Financing activities -e.g.# repayment of debt or retirement of shares..
These activities are uses of cash when cash is decreased as a result of the
particular activity.
2. 3oncash transactions do not provide or consume cash even though they
may result in significant changes in financial position. 4(amples are the
issuance of share capital for plant assets and the conversion of debt or
preference shares into ordinary shares. Such transactions are not
presented in the body of the statement of cash flows but rather disclosed in
a separate schedule as financing or investing activities.
15. 6hile net loss is usually associated with a decrease in cash# it may be a
source of cash if noncash e(penses are greater than the amount of the net
loss. For e(ample# if a net loss of P155#555 included amorti$ation and
depreciation of P1*#555 and no noncash revenues e(isted# cash provided
by operating activities would be P*#555# computed as follows7
3et loss P-155#555.
'dd7 4(penses not re%uiring cash 8 depreciation
and amorti$ation 1*#555
3et cash provided by operating activities P *#555
11. The change in cash is the difference between cash at the beginning and
end of the accounting period. The net amount of cash provided by or used
6-#
Cash Flow Analysis Chat!" 6
in operating# investing and financing activities must e%ual this change in
cash. For e(ample# if cash increased by P1*5#555 during the year# total
sources from operating# investing# and financing activities must e(ceed
total uses by P1*5#555. 'lso# if cash decreased by P*#555 during the
year# total uses of cash must e(ceed total sources by P*#555.
1. -a. The use of cash does not occur until the cash dividend is actually paid
in the ne(t period. The declaration of the dividend does affect
financial position# however# and should be disclosed as a noncash
financing activity in a separate schedule accompanying the statement
of cash flows.
-b. "ecause the dividend was declared and paid in the same accounting
period# it appears in the statement of cash flows as a cash decrease in
the financing activities category.
1&. 9isagree. The refunding of 15: debt by the 1: debt represents a
significant financing activity# even though the net impact of the e(change
on the balance sheet or on the amount of cash is not material. The
issuance of 1: bonds and the retirement of 15: bonds should be reported
as noncash financing transactions in a schedule accompanying the
statement of cash flows.
1). The net income figure includes P1*5#555 as an e(pense. 0nly P11#*55
of this amount resulted in a decrease in cash# because P&/#*55 represents
an increase in the deferred income ta( liability account. In determining
cash provided by operating activities# the amount of income ta( paid is
P11#*55 -direct method.. 'lternatively# under the indirect method#
P&/#*55 must be added to net income to determine cash flows from
operating activities.
1*. The loss is omitted when listing e(penses re%uiring cash payment -direct
approach. or added bac, to net income -indirect approach. in determining
cash provided by operating activities. This eliminates the impact of the
transaction from cash provided by operating activities. Then# the
proceeds from the sale are included as a source of cash in the investing
activities category of the statement of cash flows. 'ny ta( effects of the
transaction are included in the ta( e(pense figure and remain a part of
cash flows from operating activities.
1+. -1. 0perating activities7 Transactions that affect current assets# current
liabilities# or net income.
6-$
Chat!" 6 Cash Flow Analysis
-. Investing activities7 Transactions that involve the ac%uisition or
disposition of noncurrent assets.
-&. Financing activities7 Transactions -other than the payment of interest.
involving borrowing from creditors# and any transactions -involving
the owners of a company.
1/. Interest is included as an operating activity since it is part of net income.
Financing activities are narrowly defined to include only the principal
amount borrowed or repaid.
11. Since the entire proceeds from a sale of an asset -including any gain.
appear as a cash inflow from investing activities# the gain must be
deducted from net income to avoid double counting.
12. The direct method reconstructs the income statement on a cash basis by
restating revenues and e(penses in terms of cash inflows and outflows.
The indirect method starts with net income and ad;usts it to a cash basis to
determine the cash provided by operating activities.
5. 'n increase in the 'ccounts <eceivable account must be deducted from
net income under the indirect method because this is an increase in a
noncash asset.
1. ' decrease in the 'ccounts Payable account must be added to cost of
goods sold under the direct method. The cost of goods sold is increased by
the amount of the decrease in accounts payable. "ecause the cost of goods
sold is increased# the net cash flow provided by operating activities is
decreased. The effect of a decrease in a liability is a decrease in cash.
. ' sale of e%uipment for cash would be classified as an investing activity.
'ny transaction involving the ac%uisition or disposition of noncurrent
assets is classified as an investing activity.
II. Exercises
E%!"&is! 1
3et income................................................................... P1)#555
6-'
Cash Flow Analysis Chat!" 6
'd;ustments to convert net income to a cash basis7
9epreciation charges for the year............................ P*5#555
Increase in accounts receivable................................ -+5#555.
Increase in inventory................................................ -//#555.
9ecrease in prepaid e(penses.................................. #555
Increase in accounts payable.................................... &5#555
9ecrease in accrued liabilities................................. -)#555.
Increase in deferred income ta(es........................... +#555 -*&#555.
3et cash provided by operating activities.................... P&1#555
E%!"&is! #
Sales..................................................................... P1#555#555
'd;ustments to a cash basis7
=ess increase in accounts receivable............. 8 +5#555 P2)5#555
Cost of goods sold................................................ *15#555
'd;ustments to a cash basis7
Plus increase in inventory............................. > //#555
=ess increase in accounts payable................. 8 &5#555 +/#555
Selling and administrative e(penses...................... &55#555
'd;ustments to a cash basis7
=ess decrease in prepaid e(penses................ 8 #555
Plus decrease in accrued liabilities................ > )#555
=ess depreciation charges............................. 8 *5#555 *#555
Income ta(es........................................................ &+#555
'd;ustments to a cash basis7
=ess increase in deferred income ta(es.......... 8 +#555 &5#555
3et cash provided by operating activities............. P &1#555
3ote that the P&1#555 agrees with the cash provided by operating activities
figure under the indirect method in the previous e(ercise.
E%!"&is! $
Item Amount Add Deduct
'ccounts <eceivable...................... P/5#555 decrease ?
'ccrued Interest <eceivable........... P+#555 increase ?
Inventory....................................... P115#555 increase ?
Prepaid 4(penses........................... P&#555 decrease ?
'ccounts Payable.......................... P)5#555 decrease ?
'ccrued =iabilities......................... P2#555 increase ?
6-(
Chat!" 6 Cash Flow Analysis
9eferred Income Ta(es =iability.... P1*#555 increase ?
Sale of e%uipment.......................... P1#555 gain ?
Sale of long!term investments........ P1#555 loss ?
E%!"&is! '
Requirement (1)
3et income............................................................................... P/*
'd;ustments to convert net income to a cash basis7
9epreciation charges............................................................ P)5
9ecrease in accounts receivable............................................ 15
Increase in inventory............................................................. -&5.
9ecrease in prepaid e(penses............................................... *
Increase in accounts payable................................................ 5
9ecrease in accrued liabilities............................................... -15.
Increase in ta(es payable...................................................... 15
Increase in deferred ta(es..................................................... *
=oss on sale of long!term investments.................................. *
@ain on sale of land.............................................................. -)5. 1*
3et cash provided by operating activities................................. P25
Requirement (2)
Swan Company
Statement of Cash Flows
Operating activities:
3et cash provided by operating activities -see above.................... P 25
Investing activities:
Proceeds from sale of long!term investments................................ P )*
Proceeds from sale of land........................................................... /5
'dditions to long!term investments.............................................. -5.
6-6
Cash Flow Analysis Chat!" 6
'dditions to plant A e%uipment.................................................... -1*5.
3et cash used for investing activities............................................ -**.
inancing activities:
9ecrease in bonds payable........................................................... -5.
Increase in ordinary shares........................................................... )5
Cash dividends............................................................................. -&* .
3et cash used by financing activities............................................ -1* .
3et increase in cash -net cash flow.............................................. 5
Cash balance# beginning............................................................... 155
Cash balance# ending.................................................................... P15
6hile not a re%uirement# a wor,sheet may be helpful.
Change
Source
or
Use?
Cash
Flow
Effect
Adjust-
ments
Adjusted
Effect Classification
Assets (except cash and cash equialents!
Current assets:
Accounts receivable.................................... 10 Source +10 +10 Operating
Inventory..................................................... +30 Use 30 30 Operating
Prepai e!penses....................................... " Source +" +" Operating
#oncurrent assets:
$ong%ter& invest&ents............................... 30 Source +30 "0 '0 Investing
Plant an e(uip&ent................................... +1"0 Use

1"0 1"0 Investing
$an............................................................ 30 Source +30 30 0 Investing
"ia#ilities$ Contra assets$ and Shareholders% Equit&
Contra assets:
Accu&ulate epreciation........................... +)0 Source +)0 +)0 Operating
Current liabilities:
Accounts payable....................................... +'0 Source +'0 +'0 Operating
Accrue liabilities........................................ 10 Use 10 10 Operating
*a!es payable............................................. +10 Source +10 +10 Operating
#oncurrent liabilities:
+ons payable............................................ '0 Use '0 '0 ,inancing
-e.erre inco&e ta!es................................ +" Source +" +" Operating
S/are/olers0 e(uity:
Orinary s/ares.......................................... +)0 Source +)0 +)0 ,inancing
1etaine earnings:
#et inco&e............................................ +2" Source +2" +2" Operating
-iviens............................................... 3" Use 3" 3" ,inancing
Additional entries
Procees .ro& sale o. invest&ents.................. +)" +)" Investing
6-)
Chat!" 6 Cash Flow Analysis
$oss on sale o. invest&ents............................ +" +" Operating
Procees .ro& sale o. lan.............................. +20 +20 Investing
3ain on sale o. lan......................................... )0 )0 Operating
*otal +'0 0 +'0
E%!"&is! (
Sales.............................................................................. P+55
'd;ustments to a cash basis7
9ecrease in accounts receivable............................. >15 P+15
Cost of goods sold.......................................................... *5
'd;ustments to a cash basis7
Increase in inventory.............................................. >&5
Increase in accounts payable.................................. 85 +5
Selling and administrative e(penses............................... 15
'd;ustments to a cash basis7
9ecrease in prepaid e(penses................................. 8*
9ecrease in accrued liabilities................................ >15
9epreciation charges.............................................. 8)5 )*
Income ta(es.................................................................. &5
'd;ustments to a cash basis7
Increase in ta(es payable........................................ 815
Increase in deferred ta(es....................................... 8* 1*
3et cash provided by operating activities....................... P 25
E%!"&is! 6
Requirements (1) and (2)
Stephenie Company
Statement of Cash Flows
For the Bear 4nded 9ecember &1# 551
Operating activities:
3et income........................................................................... P *+
'd;ustments to convert net income to cash basis7
9epreciation charges.................................................... *
Increase in accounts receivable.................................... -15.
9ecrease in inventory................................................... &*
Increase in prepaid e(penses........................................ -.
Increase in accounts payable........................................ /*
9ecrease in accrued liabilities...................................... -15.
@ain on sale of investments.......................................... -*.
=oss on sale of e%uipment............................................
6-*
Cash Flow Analysis Chat!" 6
Increase in deferred income ta(es................................. 1 )1
3et cash provided by operating activities............................. 15)
Investing activities:
Proceeds from sale of long!term investments........................ 1
Proceeds from sale of e%uipment.......................................... 11
'dditions to plant and e%uipment......................................... -115.
3et cash used for investing activities................................... -15.
inancing activities:
Increase in bonds payable.................................................... *
9ecrease in ordinary shares................................................. -)5.
Cash dividends..................................................................... -1+ .
3et cash used for financing activities................................... -&1 .
3et decrease in cash............................................................. -/.
Cash balance# Canuary 1# 551............................................ 11
Cash balance# 9ecember &1# 551....................................... P )
6hile not a re%uirement# a wor,sheet may be helpful.
Change
Sourc
e or
Use?
Cash
Flow
Effect
Adjust
-ments
Adjuste
d Effect
Classi-
fication
Assets (except cash and cash equialents!
Current assets:
Accounts receivable............................. +40 Use 40 40 Operating
Inventory.............................................. 3" Source +3" +3" Operating
Prepai e!penses................................ +' Use ' ' Operating
#oncurrent assets:
Plant an e(uip&ent............................ +40 Use 40 30 110 Investing
$ong%ter& invest&ents......................... 2 Source +2 2 0 Investing
"ia#ilities$ Contra assets$ and Shareholders% Equit&
Contra assets:
Accu&ulate epreciation.................... +1" Source +1" +10 +'" Operating
Current liabilities:
Accounts payable................................. +2" Source +2" +2" Operating
Accrue liabilities................................. 10 Use 10 10 Operating
#oncurrent liabilities:
+ons payable..................................... +'" Source +'" +'" ,inancing
-e.erre inco&e ta!es......................... +4 Source +4 +4 Operating
S/are/olers0 e(uity:
Orinary s/ares.................................... )0 Use )0 )0 ,inancing
1etaine earnings:
#et inco&e...................................... +"5 Source +"5 +"5 Operating
-iviens........................................ 15 Use 15 15 ,inancing
6-+
Chat!" 6 Cash Flow Analysis
Additional entries
Procees .ro& sale o. e(uip&ent.............. +14 +14 Investing
$oss on sale o. e(uip&ent........................ +' +' Operating
Procees .ro& sale o. long%ter&
invest&ents.......................................... +1' +1' Investing
3ain on sale o. long%ter& invest&ents...... " " Operating
*otal 2 0 2
II. Problems
P"o,l!- 1
!ransaction Operating Investing inancing "ource #se
1. Short!term investment
securities were
purchased
.....................................
? ?
. 4%uipment was
purchased
.....................................
? ?
&. 'ccounts payable
increased
.....................................
? ?
). 9eferred ta(es
decreased
.....................................
? ?
*. =ong!term bonds were
issued
.....................................
? ?
+. 0rdinary shares were
sold
.....................................
? ?
/. Interest was paid to
long!term creditors
.....................................
? ?
1. ' long!term mortgage
was entirely paid off
.....................................
? ?
6-1.
Cash Flow Analysis Chat!" 6
2. ' cash dividend was
declared and paid
.....................................
? ?
15. Inventories decreased. . . ? ?
11. 'ccounts receivable
increased
......................................
? ?
1. 9epreciation charges
totaled P55#555 for
the year
......................................
? ?
P"o,l!- # /Anal0sis o1 Cash Flo2 T"ansa&tions3
Requirement (a)
The eight items should be presented in the statement of cash flows as follows7
1. 3et income is the basis for the calculation of cash flows from operating
activities by starting with that number and ad;usting for noncash revenue
and e(pense transactions -indirect method. or by computing by the direct
method the positive cash flows from revenues# less the negative cash flows
from e(penses. The cash flows from the transaction giving rise to the
e(traordinary loss is reclassified as an investing activity.
. The ac%uisition of intangibles is a negative cash flow from investing
activities. The amorti$ation is a noncash e(pense in determining cash
flows from operating activities.
&. The payment of a cash dividend is a negative cash flow that is presented
in the financing activities section of the statement.
). The purchase of treasury share is a negative cash flow in the financing
activities section of the statement.
*. The depreciation e(pense recogni$ed during the year is a noncash e(pense
in determining cash flows from operating activities.
+. The conversion of convertible bonds into ordinary shares is a noncash
financing activity that re%uires disclosure in a separate schedule.
/. The changes in plant asset accounts 8 land# e%uipment# and building 8
represent activities whose cash flow effects are presented in the investing
activities section of the statement.
1. The increase in wor,ing capital also represents the change in cash because
all other current assets and current liabilities remained constant. The net
of all cash flows from operating# investing and financing activities must
reconcile with the change in cash in the statement of cash flows.
6-11
Chat!" 6 Cash Flow Analysis
Requirement (b)
1. 3et cash provided by operating activities
3et income P1)*#555
3oncash e(pense ad;ustments7
9epreciation e(pense )+#*5
'morti$ation e(pense +#555
<eclassification of e(traordinary loss 1*#555
P1#*5
. 3et cash used in investing activities
Purchase of intangible assets P -&)#555.
Purchase of land -1&5#555.
Purchase of e%uipment -+5#555.
Purchase of building -155#555.
Sale of land 1+*#555
P-1*2#555.
&. 3et cash used in financing activities
Purchase of treasury shares P-&1#555.
Payment of dividends -1#*55.
P-)&#*55.
$omputations7
9epreciation e(pense
Change in accumulated depreciation account P&*#555
'ccumulated depreciation on fully depreciated
assets disposed 11#*5
P)+#*5
Purchase of land
Change in land account P -*5#555.
Cost of land sold in condemnation proceedings 115#555
P1&5#555
P"o,l!- $ /Cash Flo2 1"o- O!"atin4 A&ti5iti!s3
Cash received from customers7
Total revenues P11*#555
=ess7 3ote receivable -1*#555. P1/5#555
Cash disbursed for e(penses7
Total e(penses -P1/&#555 > P)#55. P1//#55
=ess7 Income ta(es deferred -1#+5.
6-1#
Cash Flow Analysis Chat!" 6
9epreciation -*#555.
'morti$ation -/#555. -1)&#2)5.
3et cash provided by operating activities P +#5+5
P"o,l!- ' /Cash Flo2 1"o- O!"atin4 A&ti5iti!s3
Cash received from customers
-1.
P*#&/#555
Cash paid for e(penses7
Cost of goods sold P&#1*5#555
Selling )+#555
Salaries and wages
-.
&2)#)55
Interest
-&.
+*#55
Discellaneous operating *#555
Incomes ta(es
-).
&&*#555 )#12*#+55
3et cash provided by operating activities P1#5)1#)55
$omputations7
1. <evenue from sales P*#)&#555
=ess7 3ote receivable -15#555.
=and -/*#555.
P*#&/#555
. Salaries and wages e(pense P )55#555
=ess7 Increase in accrued salaries and wages
-P)*#+55 8 P)5#555. -*#+55.
P &2)#)55
&. Interest e(pense P /#555
=ess7 9iscount amorti$ation -+#155.
P +*#55
). Income ta( e(pense P ))*#555
=ess7 9eferred portion -115#555.
P &&*#555
P"o,l!- ( /Stat!-!nt o1 Cash Flo2s P"!a"ation 6 In7i"!&t3
@reen Tea Company
Statement of Cash Flows
For the Bear 4nded 9ecember &1# 55*
Cash flows from operating activities
3et income
E
P1#*55
6-1$
Chat!" 6 Cash Flow Analysis
'd;ustments to reconcile net income to net
cash flows provided by operating activities7
9epreciation 1#555
'morti$ation of intangibles 1#555
Increase in current assets -+#555.
Increase in current liabilities &#555
3et cash provided by operating activities P/#*55
Cash flows from financing activities
9ividends paid -1#*55.
<etirement of long!term liabilities -1#555.
3et cash used in financing activities -#*55.
3et increase in cash P *#555
Cash# Canuary 1# 55* 15#555
Cash# 9ecember &1# 55* P1*#555
P"o,l!- 6 /Cash Flo2 Stat!-!nt P"!a"ation 6 8i"!&t3
Requirement (a)

Fundred 'cre Company
Statement of Cash Flows
For the Bear 4nded 9ecember &1# 55*
Cash flows from operating activities
Cash received from customers P/)#555
Cash paid for e(pense +/#555
3et cash provided by operating activities P/#555
Cash flow from investing activities
Sale of e%uipment 2#*55
Sale of investments 1*#555
'c%uisition of e%uipment -*&#555.
3et cash used in investing activities -1#*55.
Cash flows from financing activities
Sale of ordinary shares )5#555
Payment of cash dividends -1#*55.
3et cash used in financing activities &1#*55
3et increase in cash P15#555
Cash# Canuary 1# 55* 5#555
E
Increase in retained earnings -P5#555 8 P1&#555. P/#555
9ividends declared 1#*55
3et income P1#*55
6-1'
Cash Flow Analysis Chat!" 6
Cash# 9ecember &1# 55* P&5#555
<econciliation of net income to net cash provided
by operating activities7
3et income P1*#555
'd;ustments to reconcile net income to net
cash provided by operating activities7
9epreciation e(pense )#*55
E
'morti$ation e(pense 1#555
Increase in accounts receivable -&&#555.
9ecrease in accrued e(penses -*55.
3et cash provided by operating activities P /#555
$omputations7
Cash received from customers7
<evenues P15/#555
9educt7 Increase in accounts receivable
-P/1#555 8 P)*#555. &&#555
P /)#555
Cash paid for e(penses7
4(penses P 2#555
'dd7 9ecrease in accrued e(penses
-P/#*55 8 P/#555. *55
9educt7 9epreciation e(pense
-P&&#+55 8 P/#155 > P11#555. -)#*55.
'morti$ation -1#555.
P +/#555
Cash from sale of e%uipment7
Cost P /#*55
9educt7 'ccumulated depreciation -11#555.
Cash received on sale at boo, value P 2#*55
Cash paid to ac%uire e%uipment7
Increase in property# plant and e%uipment
-P111#155 8 P2#+55. P *#*55
Cost of machinery sold /#*55
P *&#555
Cash received on sale of shares7
Increase in ordinary shares amount
E
3et increase during 55* -P&&#+55 8 P/#155. P +#*55
'ccumulated depreciation on assets sold 11#555
9epreciation e(pense for 55* P)#*55
6-1(
Chat!" 6 Cash Flow Analysis
-P155#555 8 P/*#555. P *#555
Increase in additional paid!in capital account
-P**#555 8 P)5#555. 1*#555
P )5#555
Cash dividends7
Increase in retained earnings -P1#555 8 P1)#*55. P +#*55
3et income -P15/#555 8 P2#555. -1*#555.
P 1#*55
Requirement (b)
The reconciliation of net income to net cash provided by or used in operating
activities is re%uired to be disclosed in order to show more clearly the
relationship and emphasi$e the differences between the two. Gsers of
financial statements are often not as aware of the accrual concepts# which
determine net income# as are preparers of those statements. The reconciliation
of net income to net cash flows from operating activities clearly demonstrates
that the two are different and details those events and transactions that
account for the difference.
P"o,l!- ) /Int!""!tation o1 Cash Flo2 Stat!-!nt3
Requirement (a)
The two companies are simi%ar in the following respects7
1. 0verall si$e.
. Industry in which they operate.
&. Current ratio -.) to 1..
). 0verall peso amounts of cash provided and used7
<ange# 55!55*
Cash Provided Cash Gsed
4bony Company P1*#555 8 P1+1#555 P11*#555 8 P1/5#555
Ivory Company P1&*#555 8 P1+5#555 P1*#555 8 P1+*#555
*. 3et increase in wor,ing capital is identical for each year# 55 8
55*.
Requirement (b)
The two companies are dissimi%ar in the ma,eup of the sources of cash# as
indicated in the following analysis7
6-16
Cash Flow Analysis Chat!" 6
Sources of Cash in Percentages
55 55& 55) 55*
4bony Ivory 4bony Ivory 4bony Ivory 4bony Ivory
Cash provided7
0perations 15 &/ // 1 /5 -&1. /+ /
=ong!term debt 1 *+ !! 15 !! )) 2 !!
Share capital !! !! 1+ * !! +& !! *+
'sset disposition 1 / / 1/ &5 &1 1* &/
155 155 155 155 155 155 155 155
4bony Company has relied much more heavily on operations to provide cash
and to a very limited e(tent on debt and e%uity financing and asset disposition.
0n the other hand# Ivory Company has not been able to provide cash from
operations and has been re%uired to rely on the alternatives of debt and e%uity
financing and asset disposition.
Requirement (c)
4bony Company is in a considerably stronger position -as determined by the
data given. and thus should be considered the better investment and credit
ris,. The following points are significant7
1. 4bony Company has provided /5:!15: of its cash via operating
activities# supplementing with other means to maintain a current ratio
at the industry average. 4bony has not had to rely consistently on any
alternative source of funding.
. Ivory Company has apparently been forced to rely continuously on
debt financing e(cept in 55*# perhaps because of the inability to
obtain such financing. The year 55) is particularly wea, for Ivory#
with operations resulting in a P+5#555 reduction in cash. The ability
of Ivory to sustain its present financial position -i.e.# current ratio#
etc.. is %uestionable in light of its history.
III. Multiple Choice Questions
1. 9 ). 9 /. C 15. "
. C *. " 1. " 11. '
&. 9 +. 9 2. ' 1. 9
6-1)

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