Question

Question based on modified problems 5.2 from the reference text [Flynn (2009)] from page 169 of the textbook: Growthco goes through another year of operation (next year) (a) Please identify the sources/uses of funds (5 points), (b) Complete the statement of cash flow for next year (15 points) based on the given income statements and balance sheets, (c) Comment on Growthco (10 points) by comparing its performance next year to its performance this year. Growthco Income Statement ($000) This Year Next Year 5,477 Revenue 4,223 Warranty/ Bad Debt 27 31 Net Revenue 4,196 5,446 COGS 2,695 3,488 Contribution Margin Contribution Margin (%) 1,501 1,958 35.5% 35.7% Sales, General, and, Administrative Expense SG&A excluding depreciation) 719 815 620 Depreciation 620 523 Operating Income 162 -24 Other Income -21 Net Income 138 502 Growthco Statement of Retained Earnings ($000) Retained Earnings, start of year Net Earnings for the year This Year Next Year 582 482 138 502 Less: Dividend Paid 38 200 Retained Earnings, end of year 582 884 (a) Balance Sheet $(000) This Year Source of funds Use of funds Next Year Current Assets: Cash Receivables 877 1,140 Short-term investment Inventory Prepaid Expenses 589 754 54 66 1,960 1,520 Fixed Assets: Land, building, and equipment @ cost 6,200 6,200 Less Acc. Depreciation 1,520 2,140 4,680 4,060 Long-term investment Goodwill Total Assets 6,200 6,020 Current Liabilities: S.T. Credit Line 609 53 Accounts Payable 477 387 Accrued Expenses 67 93 Taxes payable 15 33 Cur. Por. of L.T. Debt 60 60 716 1,138 Long Term Liabilities: Repayable grants Long Term Debt 480 420 Shareholders Equity: Capital Shares 4,000 4,000 Retained Earnings 582 884 Tot. Liab. and Eq. 6,200 6,020 Sources/uses of funds Growthco Statement of Cash Flow ($000) (b) This Year Next Year Operating Activities Net earnings for the year 138 Depreciation 620 Changes in non-cash working capital -297 461 Subtotal Investing Activities Additions to fixed assets -1,700 Additions to goodwill and intangibles Subtotal -1,700 Financing Activities Dividends -38 Net new long-term borrowings 160 Net new capital shares 700 Subtotal 822 Funds flow -417 Cash on hand (start of year) -192 Cash on hand (end of year) -609 -417 Change in cash position (c) Comment on Growthco:

Answer 1

	This Year	Next Year	Source of Funds	Use of Funds
Current Assets:
Cash	$           -	$            -
Receivables	$       877	$     1,140		$             (263)
Short Term Investment	$           -	$            -
Inventory	$       589	$         754		$             (165)
Prepaid Expenses	$          54	$           66		$               (12)
	$    1,520	$     1,960
Fixed Assets
Land buidling and equipments, at cost	$    6,200	$     6,200
Less: Acc. Depreciation	$ (1,520)	$   (2,140)
	$    4,680	$     4,060
Total Assets	$    6,200	$     6,020
Current Liabilities
ST Credit Line	$       609	$           53		$             (556)
Accounts Payable	$       387	$         477	$                        90
Accrued Expenses	$          67	$           93	$                        26
Taxes Payable	$          15	$           33	$                        18
Cur Por of LT Debt	$          60	$           60
	$    1,138	$         716
Long Term Liabilities
Long Term Debt	$       480	$         420		$               (60)
Shareholders Equity
Capital Shares	$    4,000	$     4,000
Retained Earnings	$       582	$         884	$                      302
Tot Liab and Eq	$    6,200	$     6,020

The logic is as follows

For assets- Imagine Inventory, if it has increased at year end, this means you paid to acquire the additional inventory, so it is an outflow or use of fund. If it would have decreased it would have meant that the inventory is sold which means it is an inflow or source of fund.
For liabilities, the exact opposite is the logic.

Cash Flow

		Next Year
Operating Activities
Net earnings		$         502
Depreciation		$         620
Changes in working Capital
Increase in receivables		$       (263)
Increase in inventory		$       (165)
Increase in prepaid expenses		$         (12)
Increase in Accounts Payable		$           90
Increase in Accrued Expenses		$           26
Decrease in ST Credit Line		$       (556)
Increase in Taxes Payable		$           18
Subtotal		$         260
Investing Activities
Additions to Fixed Assets		$            -
Additions to Goodwill and intangibles		$            -
Subtotal		$            -
Financing Activities
Dividends		$       (200)
Net new long term borrowings		$         (60)
Net new capital shares		$            -
Subtotal		$       (260)
Funds Flow		$            -
Cash on hand		$            -
Cash on hand		$            -
Change in cash position		$            -

As per balance sheet, there was no cash in the beginning and no cash at the end

	This Year	Next Year	Change	Percent Change
Current Assets:
Cash	$           -	$            -	$           -
Receivables	$       877	$     1,140	$        263	29.99%
Short Term Investment	$           -	$            -	$           -
Inventory	$       589	$         754	$        165	28.01%
Prepaid Expenses	$          54	$           66	$          12	22.22%
	$    1,520	$     1,960	$        440	28.95%
Fixed Assets
Land buidling and equipments, at cost	$    6,200	$     6,200	$           -	0.00%
Less: Acc. Depreciation	$ (1,520)	$   (2,140)	$      (620)	40.79%
	$    4,680	$     4,060	$      (620)	-13.25%
Total Assets	$    6,200	$     6,020	$      (180)	-2.90%
Current Liabilities
ST Credit Line	$       609	$           53	$      (556)	-91.30%
Accounts Payable	$       387	$         477	$          90	23.26%
Accrued Expenses	$          67	$           93	$          26	38.81%
Taxes Payable	$          15	$           33	$          18	120.00%
Cur Por of LT Debt	$          60	$           60	$           -	0.00%
	$    1,138	$         716	$      (422)	-37.08%
Long Term Liabilities
Long Term Debt	$       480	$         420	$        (60)	-12.50%
Shareholders Equity
Capital Shares	$    4,000	$     4,000	$           -	0.00%
Retained Earnings	$       582	$         884	$        302	51.89%
Tot Liab and Eq	$    6,200	$     6,020	$      (180)	-2.90%

	This Year	Next Year	Change	Percent Change
Net Revenue	$    4,196	$      5,446	$ 1,250	29.79%
COGS	$    2,695	$      3,488	$     793	29.42%
Contribution	$    1,501	$      1,958	$     457	30.45%
Contribution Margin	35.54%	35.75%	0.21%
SGA and Depreciation	$    1,339	$      1,435	$        96	7.17%
Operating Income	$        162	$         523	$     361	222.84%
Other Income	$        (24)	$         (21)	$          3	-12.50%
Net Income	$        138	$         502	$     364	263.77%
Net Income Percentage	3.27%	9.17%	5.90%

If the above analysis are studied, we find that the company has performed better. It has been able to achieve close to 30% growth in its revenue as compared to the previous year. Due to this significant jump, there is a 5% increase in the net profits. Owing to this, the operating income has increased to more than 3 times. The SGA expenses have not increased that significantly. The increase is only 7% as compared to 30% increase in revenue resulting in higher margins for the company.