Acme Packet Harvard Case Solution & Analysis

ANSWER TO QUESTION # `1

There is a disparity between the operating income statement as well as the cash flow statement. The operating income shows a loss of $602 million whereas the operating cash flow shows a positive balance of $22 million.

The difference between these two amounts is because the company has recorded its expenses in the income statement whereas, on the other hand the company has not actually paid those expenses. This has decreased the profits of the company as company has charged those expenses in the profit and loss account.

Whereas, the cash balance of the company has not decreased with the same amount because the company has not yet paid those expenses. The net difference between the amount of operating cash flow and the amount of loss is (602 – 22) $580 million.

Analyzing the calculation and financial statements it is observed that the amount of accrued expenses has been increased during the year by $700 million. This has indirectly increased the cash of the company and decreased the profits of the company.

The company is incurring heavy expenditures especially on,research and development, and sales and marketing. It is assumed that almost 70% of these expenses are accrued. These expenditures are the major reasons of the company to incur losses. These amounts are not sustainable as these will decline the profitability of the company as well as the company may suffer from liquidity problems.

ANSWER TO QUESTION # 2

There are few convincing economic justification behind the fact that the company has a positive gross profit margin and a negative operating income margin. Basically, the gross profit margin shows the margin or amount left after deducting direct costs or product costs from the revenue of the product. Whereas, the operating margin shows the amount left after deducting indirect costs from the gross profit margin of the company.

The financial statements shows that the company’s direct expenses (cost of sales) is very low as compared to the operating expenses of the company. Therefore, this results in positive gross profit margin because of low direct expenses, and negative operating margin because of high operating expenses.

The major elements of operating costs are cost of research and development and cost sales and marketing. These two costs constitutes approximately 80% of the overall operating costs of the company.

ANSWER TO QUESTION # 3

 When cash is received from a debtor, the accounts receivable recorded by the company for that particular debtor decreases because then the company does not owe any amount from the debtor. This increases the cash of the company therefore it should be added into the cash flow as a positive balance as well as on the other hand, it decrease the accounts receivable from the debtor therefore the company should decrease the amount of receivables.

 The opening balance of the receivable is $600 million whereas, the closing balance of accounts receivable is 575 million. This shows that the accounts receivable of the company has been declined by $25 million which subsequently depicts that the amount of cash has been increased by 25 million.

ANSWER TO QUESTION # 4

Cash flow only deals with the operations that involved cash transactions. Or it can be said that every transactions that includes cash should be incorporated in the cash flow statement. Moreover, the depreciation expense is a non-cash item.

Depreciation is incorporated in the profit and loss account of the company as a depreciation expense. Whereas, the accumulated depreciation is accounted for in the balance sheet as it reduces the amount of related property plant and equipment.

Since the depreciation expense has no impact on the cash of the company therefore its effect shall be nulled while making a cash flow statement. Since depreciation expense is incorporated in the income statement of the company as a negative amount, therefore, in order to nullify the effect of depreciation, it should be added back in the operating profit of the company while making cash flow statement of the company.....................

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