You have just been hired as a financial analyst for Basel Industries. Unfortunat

Question

You have just been hired as a financial analyst for Basel Industries. Unfortunately, company headquarters (where all of the firm's records are kept) has been destroyed by fire. So, your first job will be to recreate the firm's cash flow statement for the year just ended. The firm had $100,000 in the bank at the end of the prior year and its working capital accounts except cash remained constant during the year. It earned $5 million in net income during the year but paid $700,000 in dividends to common shareholders. Throughout the year, the firm purchased $5.5 million of machinery that was needed for a new project. You have just spoken to the firm's accountants and annual depreciation expense for the year is $440,000; however, the purchase price for the machinery represents additions to property, plant, and equipment before depreciation. Finally, you have determined that the only financing done by the firm was to issue long-term debt of $1 million at a 7% interest rate. What was the firm's end-of-year cash balance? Recreate the firm's cash flow statement to arrive at your answer.

Explanation / Answer

Cash flow statement for the year just ended Operating cash flow: Net Income for the Year 5000000 Add: Non-cash expense Depreciation -Machinery 440000 Cash generated from Operating activities 5440000 Investing cash flow: Purchase of machinery -5500000 Cash used in Financing activities -5500000 Financing cash flow: Dividends paid -700000 Issue of 7% long-term debt 1000000 Cash generated from Financing activities 300000 Net Cash flow during the Year 240000 Opening Cash balance 100000 Ending cash balance 340000

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