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 ban 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 $750,000 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 $450,000; 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 6% interest rate. What was the firm's end-of-year cash balance?

Explanation / Answer

Basel Industries Statement of Cash Flows For the Year Ended December 31,

Cash flows from operating activities:
Net income 5,000,000
Add back depreciation expense 450,000
Net cash flows from operating activities -> 5,450,000

Cash flows for investing activities:
Cash paid for machinery (5,500,000)
Net cash flows for investing activities -> (5,500,000)

Cash flows from financing activities:
Cash received from issuing long-term debt 1,000,000
Cash paid for dividends (750,000)
Net cash flows from financing activities -> 250,000

Net increase in cash -> 200,000

Cash balance, January 1(Opening bal) ->100,000

Cash balance, December 31, -> 300,000

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