a. Discuss the company\'s ability to meet its non-operating needs for cash over

ID: 2577535 • Letter: A

Question

Discuss the company's ability to meet its non-operating needs for cash over these three years, and comment on the continuing nature of the major items that have appeared over this time period.

Comment on the changes in Yellow Spruce's accounts receivable, accounts payable, and inventory levels over these three years.

How did Yellow Spruce finance its repayment of long-term debt and its acquisition of property, plant, and equipment and investments in 2016?

Describe how the company's mix of long-term financing has changed during this three-year period, in terms of the proportion of debt versus equity.

(Hint: Start by calculating the total amount of the increase or decrease in long-term debt, and comparing it with the total amount of the increase or decrease in shareholders' equity.)

YELLOW SPRUCE INCORPORATED Statements of Cash Flows (in millions) 2016 2015 2014 Operating activities Net income Add back: $ 57 S 86 98 Depreciation expense 82 75 65 Loss (gain) on sale of investments Effect of changes in working capital items: Accounts receivable 30 (17) (21) 13 (12) (38) (39) (21) Prepaid expenses Accounts payable Net cash inflow from operations 27 35 113 175 118 Investing activities Acquisition of property, plant, and equipment (154) (161) (152) (23) (S1) (72) Proceeds from sale of property, plant, and equipment 16 27 Net cash outflow for investing activities Financing activities Issuance of long-term debt Repayment of long-term debt Issuance of shares Repurchase of shares Dividends paid (161) (20)(197) 213 (131) 12 156 332 (72) 93) (38) (84) (14) 32 Net cash inflow from financing activities Overall increase in Cash position at beginning of year Cash position at end of year (16) 78 30 100 (15) 140 61 cash 94 $ 130 S 100 94

Explanation / Answer

.a)The company has net cash inflow from operating activities. These cash inflows are utilized to meet the non-operating need of investing activities

Total operating cash inflow during the three years(2014,2015 and 2016) was(118+175+113)=$406 million

Cash used in investing activities=(197+201+161)=$559 million for plant, property & equipment and (23+51+72)=$146 million in acquisition investment

The company is not able to meet non-operating cash needs over the three years and had to borrow money to meet the needs

The major items that have appeared are:

Cash spent on acquisition of property, plant & equipment and acquisition of investments.

These are financed by cash flow from operating activities and net increase in long term debts.

.b. Accounts Receivable

Accounts receivable increased(by $39 million) in 2014 and then it decreased by $30 million in 2015 . Again it increased by $38 million.

Net increase during the three years=(39+38-30)=$47 million.

Accounts Payable:

Accounts payable increased during the year 2014 (by $35 million),decreased by$12 million in2015 and againg increased by $27 million during 2015.

Net increase during the three years(35+27-12)=$50 million

Inventory:

Inventory has increased during each of the three years though net income has decreased in each year.

Total increase in inventory during the three years=(21+17+21)=$59 million

.c. Yeollow Spruce financed the repayment of long term debt and acquisition of plant, property & equipment and investments in 2016 by:

Cash flow from operations:$113 million

Issuance of long term debt:$213 million

.d. Change in mix of long term financing:

2016

2015

2014

Total

Issuance of long term debt

213

156

332

701

Repayment of long term debt

131

296

C=A-B

Net increase in long term debt

239

405

Increase in equity

Repurchase of shares

122

F=D-E

Net increase in Equity

-38

-84

-110

Over the three years There has been net increase in Debt by $405 million and decrease in equity by $110 million

Retained earnings increased by net income of (98+86+57)=$241 million but it reduced by dividend payment of (15+14+16)=$45 million

Net increase in retained earnings=$196 million

Overall debt equity ratio has increased