Question

(Cash Flow Statement) Consider the following potential events that might have taken place at Global Conglomerate on December 30, 2015. For each one, indicate which line items in Global’s balance sheet would be affected and by how much. Also indicate the change to Global’s book value of equity. (In all cases, ignore any tax consequences for simplicity.) a. Global used $20 million of its available cash to repay $20 million of its long-term debt. b. A warehouse fire destroyed $5 million worth of uninsured inventory. c. Global used $5 million in cash and $5 million in new long-term debt to purchase a $10 million building. d. A large customer owing $3 million for products it already received declared bankruptcy, leaving no possibility that Global would ever receive payment. e. Global’s engineers discover a new manufacturing process that will cut the cost of its flagship product by over 50%. f. A key competitor announces a radical new pricing policy that will drastically undercut Global’s prices.

Answer 1

a.

The repayment of long term debt would lead to decrease in long term debt by $20 million. The cash balance would also decrease by $20 million as there is cash outflow. This would not impact the book value of equity.

b.

In this case inventory would decrease by $5 million as inventory is detroyed. This loss in inventory would lead to decrease in net income and thus decrease the book value of equity by $5 million.

c.

The transaction would lead to increase in assets in the form of building (non-current assets) by $10 million as new building is purchased.

Long term debt would increase by $5 million as new loan is obtained which would increase liability of business.

Cash would decrease by $5 million as there is cash outflow. This transaction would not impact the book value of equity.

d.

The bankruptcy of customer would lead to decrease in accounts receivable that is current assets of company by $3 million.

This would result in loss for company and thus book value of equity would decrease by $3 million.

e.

In this case company has discovered new product, however there is no financial transaction and thus would not impact the balance sheet.

f.

The change in pricing policy of competitor does not impact the balance sheet.