Reading 34: Understanding the Cash Flow Statement - LOS f, net, investment, customers, industry, company

mayanfang1

Q11. John Stone, CFA, is an investment advisor specializing in the preparation of company and industry reports for high net worth customers at Learmon Brothers. Currently, Stone is preparing a report on Soft Corporation, a rapidly growing software company. The explosive growth of this company was financed primarily by an initial public offering in which 3,000,000 shares were issued at a price of $20 per share on June 27, 2004. Soft Corporation received additional capital when employee stock options for 1,000,000 shares at a price of $10 were exercised on January 1, 2005. Stone realizes the importance of cash flow on a company's financial health and would like to include a projected statement of cash flows for 2005. Soft Corporation financial statements are presented in Tables 1 and 2. Included are the actual statements for the year ending December 31, 2004.

Table 1
Soft Corporation Balance Sheets
as of December 31
(in millions)
		Actual 2004	Projected 2005
Cash		$24.0	$26.0
Accounts Receivable		17.0	24.0
Inventory		100.0	150.0
PP&E		100.0	125.0
Accumulated depreciation		(30.0)	(35.0)
	Total Assets	$211.0	$290.0
Accounts payable		$91.0	$101.0
Long-term debt		20.0	40.0
Common stock		80.0	90.0
Retained earnings		20.0	59.0
	Total liabilities and equity	$211.0	$290.0
Table 2
Soft Corporation Income Statement
for Years Ended December 31
(in millions except per share data)
		Actual 2004	Projected 2005
Sales		$80.0	$198.0
COGS		(38.0)	(90.0)
	Gross profit	$42.0	$108.0
SG&A		(13.0)	(30.0)
Depreciation		(3.0)	(5.0)
	Operating expenses	$(16.0)	$(35.0)
Interest expense		$(4.0)	$(5.0)
Pretax Income		22.0	68.0
Income tax expense		(7.0)	(25.0)
Net income		$15.0	$43.0
EPS		$2.0	$4.3
Average shares outstanding (millions)		7.5	10.0
Dividends per share		$0.1	$0.4

Under the indirect method, what will Stone find Soft Corporation's projected net change in cash to be for the year ending December 31, 2005?

A)   $2,000,000.

B)   $9,000,000.

C)   $4,000,000.

mayanfang1

答案和详解如下：

Correct answer is A)

Using the easiest method of all, the difference in the cash account at the end of 2004 and the cash balance projected for the end of 2005 is $26.0 million - $24.0 million = $2.0 million. If the cash balances were not available, the change in cash could be calculated using the indirect method. Starting with cash flow from operations (CFO) in $ millions projected for 2005:

Net Income	43
Add: Noncash Expenses or Losses
Depreciation	5
Add: Changes in Current Assets and Liabilities
Less: Increase in Accounts Receivable	-7
Less: Increase in Inventory	-50
Plus: Increase in Accounts Payable	10
Net Cash Flow from Operations (CFO)	1
Increase in Property Plant & Equipment	-25
Net Cash Flow from Investing (CFI)	-25
Increase in Long-Term Debt	20
Increase in Common Stock	10
Less: Dividends Paid (10 million × $0.40)	- 4
Net Cash Flow from Financing (CFF)	26

Net Cash Flow = CFO + CFI + CFF = 1 – 25 + 26 = $2 million.

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