Question

Exercise 13-15 (Essay) Colin Confections operates convenience stores, primarily in small Southeastern towns. The cash flows provided by financing activities section of the company's statement of cash flows for the fiscal years 2014-2016 follows (in $000) For the Years Ended June 30 2015 2014 Proceeds from long.term debt Payment cf long-term debt Proceeds from the exercise of stock options $100,000 $(21,100) S(31,364) (22,814) 2,941 1,346 2,104 (15,246) (13,180) (0,098) Payment of cash dividends Excess tax benefts related to stock option exercises 919 Net cash provided (used) by financing activities $(34,488) (41,833) $70,948 512 607 At the beginning of fiscal 2016, Colin Confections had $154,523 in cash and cash equivalents; at the end of fiscal 2016, the company had $145,695 in cash and cash equivalents. How have cash flows provided by financing activities changed over the three-year period? Does the fact that Colin Confections reports no proceeds from long-term debt for 2015 and 2016 mean that the company has no long-term debt? Why? Does it concern you that in two of the past three years, Colin Confections used more cash than was provided by financing activities? Why?

Answer 1

Q1: The company issued new long term debt in 2014 for raising capital, whereas the same was not the case in the succeeding two years. The payment of long term term debt increased in 2015 and reduced in 2016. This indicates that the company paid off a major debt in 2015 thereby reducing the debt service obligations in the future years. The stock options were not exercised in full for the years 2015 and 2016 and hence the proceeds were lower over the three year period. Therefore, tax benefits from these options were also lower. The company increased the dividend payment each year over the three years which may be either due to higher profits or higher payout ratio.

Q2: No, it does not mean that Colin has no long term debt as there was no proceeds from long term debt in 2015 and 2016. Th fact is the Colin will have to service the debt obligations that in took in previous years. For example, the long term debt that was raised in 2014 will have to be serviced in 2015 and 2016 although there was no new debt in these years

Q3: No, it does not concern us much because the main source of cash for the company is the cash flow from operating activities. The cash flows from financing activities are a use of cash in most case and not a source of cash. So, it does not concern much. Also the good thing is that Colin did not raise additional debt in 2015 and 2016 which is a positive.