Question

Last year, Blanda Brothers had positive cash flow from operation; however, cash on its balance sheet decreased. Which of the following could explain this? Select one: O a. The company sold some of its assets. b. The company issued new common stock. c. The company eliminated its dividend. d. The company sold a lot of new fixed assets. O e. The company paid off some of its long-term debts. At the end of 2017, Lehnhoff Inc. had $75 million in cash. During 2018, the following events occurred: • Cash flow from Lehnhoff's operating activities totaled $325 million. • Lehnhoff issued $500 million in common stock. • Lehnhoff's notes payable decreased by $200 million. · Lehnhoff purchased fixed assets totaling $600 million. How much cash did Lehnhoff Inc. have at the end of 2018? Select one: O a. $ 100 million b. $ 50 million. c. $ 400 million d. $1,400 million e. $ 200 million

Answer 1

1.

It is given that firm had positive cash flows from operations and thus, there cash balance should be more but it is given that cash on the balance sheet has decreased. All the options are explained as follows -

a. The company sold some of its assets - False because selling assets would result in proceeds of the asset coming back in the business which should result in increased cash balance. Thus, it is not correct.

b. The company issued new common stock - False because issuing new common stock would result in subscription to the common stock in exchange of funds. These funds should increase the cash on the balance sheet but it is not the case. Thus, it is not correct.

c. The company eliminated its dividend - False because eliminating dividend means company did not pay off the dividend to its shareholders and retained the earnings in the business and thus, cash balance should be higher but that is not the case.

d. The company sold a lot of new fixed assets - False. Selling new fixed assets would result in increased cash balance due to incoming proceeds of such sale. However, given case is opposite of this. This is not correct.

e. The company paid off some of its long term debts - True. Paying off long term debts means company reduced its liabilities by paying them with excess cash generated from business which will result in reduced cash balance at the end of the year. Thus, it explains the same.

Answer is Point no. e.

2.

Cash balance of $75 Million is given at the end of 2017 along with other cash incoming and outgoing from the business during the year 2018. By adding incoming cash to the opening cash balance and subtracting cash outgoing from the same will get the cash left at the end of 2018. Below table has summarized the same -

1 Particulars Cash at the end of 2017 Cash flow from company's operating activities Issued Common Stock 3 Add 4 Add C D US $ in Millions $ 75.00 $325.00 $ 500.00 $ 825.00 $ 900.00 $ 200.00 $ 600.00 $ 800.00 5 6 Less 7 Less Decreased Notes Payable Purchased Fixed Assets Cash balance at the end of 2018 $ 100.00

Formulas used in the above table is as follows -

C D US $ in Millions 2 175 B 1 Particulars Cash at the end of 2017 3 Add Cash flow from company's operating activities 4 Add Issued Common Stock 5 6 Less Decreased Notes Payable 7 Less Purchased Fixed Assets 325 500 =+C4+C3 =+D2+D4 200 600 =+C6+C7 Cash balance at the end of 2018 =+D5-D7

Notes -

1. Cash flow from operating activities is added because it is incremental in nature.

2. Issuance of Common stock would result in funds will come in the business in exchange of common stock. Therefore, added.

3. Notes payable, as name suggests are payable in nature. At the end of the year balance of these is decreased which means they were paid off during the year. Therefore, deducted.

4. Purchase of fixed assets means outgoing cash for payment of fixed assets. Therefore, the same is reduced.

At the end of the 2018, cash balance is $100 Million which $25 Million more than the cash balance available ($75 Million) at the end of 2017.