Question

1. Explain and detail the AOS's operating cash flows?

2. In 2017, AOS Industries had contemplated buying a new warehouse for $2 million, the cost of which
would be depreciated over 10 years.
If AOS Industries has a tax rate of 25%, what would be the
impact for the amount of cash held by AOS at the end of the 2018?

Use the table for the question(s) below. AOS Industries Statement of Cash Flows for 2017 Operating activities Net Income Depreciation and amortization Cash effect of changes in Accounts receivable Accounts payable Inventory Cash from operating activities Investment activities Capital expenditures Acquisitions and other investing activity Cash from investing activities -0.4 Financing activities Dividends paid Sale or purchase of stock Increase in short-term borrowing Increase in long-term borrowing Cash from financing activities Change in Cash and Cash Equivalents

Answer 1

Part (1)

Based on the data we can say the following about the operating cash flows

• Cash flows from operating activities are positive. This shows the operations are in good health.
• It collected more cash from its customers than they charged.
• It sold more inventory than it bought.
• It charged more on its accounts payable back than it paid back.

Part (2)

It would have $1,950,000 less cash at the end of 2018. This is because the change in cash flows = - capital investment + Annual Depreciation tax shield = - 2,000,000 + (2,000,000 / 10) x 25% = - $ 1,950,000

Hence, the cash flow balance will reduce by $ 1,950,000