STATEMENT OF CASHFLOWS Harvard Case Solution & Analysis

STATEMENT OF CASHFLOWS Case Solution

INTRODUCTION

This case provides a good understanding of statement of cash flows; the case involves three companies with three statements of cash flows. The assignment also covers detailed examination of statement of cash flows; the detailed examination is as follows:

 ALPHA COMPANY, BETA AND GAMMA COMPANY

WHAT WERE THE FIRM’S MAJOR SOURCES OF CASH? ITS MAJOR USES OF CASH?

In the year 1989, Alpha’s net operating cash flows showed a major decline, which can be seen in form of significant investment in depreciable assets. The other reason was increase in inventory, which resulted in cash outflow. The other major use of cash was the continuing trend of paying long-term debts. The major source of cash for Beta remained the cash proceeds from its debt. In 1989, the major source of cash inflow was the cash they received from their customers. Apart from this, inflow they also managed to raise significant amount of proceeds through debt and proceeds from the issuance of stock. The major use of cash was seen in the form of the amount of interest they paid for the capital expenditure they incurred and the net payment they made in form of net working capital line of credit. In the year 1989, Gamma’s major source of cash remained the issuance of debt and treasury shares. Other adjustments to income showed positive net operating cash flows, the major outflow and use for Gamma was the purchase of treasury shares and repayment of debt.

In the year 1990, the biggest source of cash for Alpha were proceeds from sales of depreciable and other assets. The Alpha company also discontinued one of its operations, which in turn generated significant cash inflow. The major sources of outflows were the decrease in the short term borrowing and the repayment of long term debt. In the year 1990, Beta  major source of cash was the cash it received from customers and major outflow was the capital expenditures and payment to lenders from line of credit. In the year 1990, although net operating cash flows of Gamma were lower than the preceding year, their major source of cash was the increase its receivables showed during that year, the issuance of treasury shares was the major source of cash outflow, as was the purchase of treasury shares and the huge amount of capital expenditure.

In the year 1991, the major sources of cash for Alpha were account receivables which significantly contributed in net cash flows from operations. Another major source were proceeds from the sale of depreciable and other assets. The major use of cash in the year 1991 was in the form of payments of long-term debt and investment in the depreciable assets. In the year 1991, the major source of cash for Beta were the proceeds from the issuance of common stock and the major expenditure was the purchase of marketable securities and capital expenditure. The major sources of cash for Gamma Company in the year 1991 was issuance of shares and proceeds from debt issue and the important cause of outflow was capital expenditure and repayment of debt.

The Alpha Company recorded loss in three consecutive years from 1989 to 1991 the net cash flows from operations were greater in these three years. The major reason behind the fact that net cash flows from operations are greater than net income is that depreciation was added back as a non-cash expense in the calculation of net cash flows from operations and the depreciation formed a significant part in net cash flows from operations..................

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