Question

A comparative balance sheet for “Alpha” Company containing data in € for the last
recent years is as follows:

20X2 20X2 20X1 Assets Fixed assets: Land Buildings Less accumulated depreciation Equipment Less accumulated depreciation Total fixed assets 170,000 450.000 (110,000) Comparative Balance Sheet Liabilities & 20X1 Stockholders' Equity Stockholders' equity: 225,000 Common stock 450.000 Retained earnings (100,000) Total stockholders' equity 300.000 Long - term liabilities: (100,000) Long-term notes payable 265,000 135,000 400,000 200.000 100.000 300,000 425.000 (125,000) 30,000 30,000 810,000 775,000 420,000 430,000 Long-term debt Total long-term liabilities Current liabilities: Current assets: 450,000 460,000 ICS Cash and cash equivalents Marketable securities Accounts receivables Inventory Total current assets 20.000 20.000 25,000 41,150 106,150 1,100 25,000 30,000 40,000 96,100 Accounts payable Notes Payable Accrued Expenses Taxes Payable Total current liabilities Total liabilities Total liabilities & stockholders' equity 20.000 20,000 16.150 10,000 66,150 516,150 916,150 30,000 40.000 11,100 30,000 111,100 571,100 871,100 L Total assets 916,150 871,100

Required:
1. Prepare the cash flow statement for “Alpha” Company for this year 20X2,
using the direct method. .
2. How can a firm distribute (finance) a positive (negative) cash component of
earnings? Explain briefly (max: 300 words)

Answer 1

Answer is given below with working notes

Amount in Euro ALPHA COMPANY Statement of Cash flows (Direct method) For the year ended December 31,20X2 Cash flows from Operating Activities Amount Cash received from customers 1,140,600 Cash received as dividend 4,150 1,144,750 Less: Cash payments for Cash paid for Suppliers -711,150 Cash paid for operating expense -259,950 Cash paid for Interest -53,500 Cash paid for Income taxes -53,850 - 1,078,450 Net Cash provided by Operating Activities 66,300 Cash flows from Investing Activities Sale of Land 59,000 (55,000+4,000) Purchase of Equipment -125,000 (425,000 - 300,000) Sale of marketable securities 13,000 (5,000+8,000) Net Cash from Investing Activities -53,000 Cash flows from Financing Activities Issuance of common stock 65,000 Payment of dividend -29,400 (100,000+64,400-135,000) Repayment of Note payable -20,000 Repayment of Long term debt -10,000 (430,000 - 420,000) Net Cash from Financing Activities 5,600 Net change in cash 18,900 Cash and Cash equivalents at beginning of year 1,100 Cash and Cash equivalents at end of year 20,000 2 If a firm has a positive cash flow from operations it can be used in following ways 1 Purchase of fixed assets to expand operations 2 Payment of dividend to shareholders 3 Retirement of Bonds 4 Repayment of Borrowings/Loans/Notes payable 5 Repurchase of treasury stock On the other hand is there is negative cash flow from operations additional finance may be needed and it cab be raised in following ways 1 Issue of common stock/preferred stock 2 Borrowing through bonds 3 Bank borrowings 4 Borrowing through notes payable Working notes: A Amount of cash received from Customers Sales Add: Decrease in Accounts receivable Net cash received from customers 1,135,600 5,000 1,140,600 Cost of inventory purchased Cost of Goods sold Add : Increase in inventory Merchandise purchase 700,000 1,150 701,150 Amount of cash paid to suppliers of merchandise cost of purchase Add: Decrease in Accounts payable Cash paid for Suppliers 701,150 10,000 711,150 Amount of cash paid to wages and Operating expense Selling and administrative expenses Less: Depreciation less: Increase in Accrued expense Net cash paid for operating expense 300,000 -35,000 (10,000+25,000) -5,050 259,950 D Cash paid for interest Interest expense 53,500 Net cash paid for Interest 53,500 Cash paid for income tax Income tax expense Add: Decrease in tax payable Net cash paid for Income tax 33,850 20,000 53,850