Question

Harry and Joe's Repair Service Harry and Joe were friends in high school. They were both interested in cars and were very skilled at repairing them. During the summer, they created summer jobs by taking care of neighbors' and friends' cars. They called their company Shade Tree Mechanics Co. They would pick up the car, bring it to Joe's backyard under a large shade tree, wash and wax it, do a tune- up, or perform other minor repairs as needed. After high school, they each went to work for large auto dealerships in the area. They then decided to create their own repair service. That was 20 years ago, and they have been very successful since then. They now have a large repair fa- cility that specializes in cars and light trucks and employs 58 people, including the office per- sonnel. They even have a popular talk show on the local radio station about car repairs. They have purchased the latest computer test equipment, have many trucks and vans for pickup of cars and parts, extensive office computer systems, and a great deal of other equipment that is used in the repair shop. The total value of the shop, office, and trucks is approximately $400,000. The building that they own cost $200,000 eight years ago and they have since re- modeled it and added on to the facilities During a recent lunch at the deli across the street, Joe and Harry were discussing the com- pany's finances. Joe said, "The bookkeeper says that we made more money last year than ever!" Harry said, "Yes, but where is it? All we ever do is buy new equipment for the shop or the office. We get a good salary from the business, but shouldn't we get some dividends as owners?" Joe said, "We've got a cash flow problem. Harry said, "Right. All the cash is flowing out and nothing to us! Joe agreed. "You're right, but the bookkeeper said that we are using the best depreciation methods we can and that we are saving on taxes because of our depreciation methods Depreciation, cash flow-accounting stuff! All I know is that for all the work we do and Il the customers that are happy with our work, we sure don't get much in return! We're not get- ting any younger-what about our retirement?" Harry saicd

Answer 1

1. If I am Margaret , first I would explain them difference between Cash and Non cash items in the financial statements. In addition to that , I would explain them what is actual cash outgo and how Cash and Non cash items are connected with each other to analyse financial statements.

2.Concept of Depreciation and Cash flows are as follows:-

Depreciation :- It is non cash item in financial statements. It is not actual outgo of funds. When any asset is introduced in business and used for longer period of time , we need to spread the value of the asset over useful life of the asset. In simple word , depreciation is reduction in the value of the asset over useful life of that asset. There are different methods of depreciation.

Cash Flow:- Cash flow is summary of all actual Cash inflows and Cash outflows. All non cash items needs to be added back and only tax effects needs to be considered for outflow of funds.  

3. Cash flow after tax could be used to show Harry and Joe their financial results.

- All the cash inflow and outflow to be considered.

- Deduct non cash expenses and calculate tax accordingly.

- Add back all non cash items so that Cash flow after tax analysis would be ready.

4. Harry and Joe both need to consider the actual cash flow after tax for their any further analysis. Because it will clearly give them idea about the fund availability. Whatever funds remains as " cash flow after tax" they need to bifurcate the same between their retirement planning and business requirement.