Below are summary cash flow statements for three roughly equal-sized companies.

Question

Below are summary cash flow statements for three roughly equal-sized companies.

Calculate each company’s cash balance at the end of the year.

Looking at companies A and B, which company would you prefer to own? Why?

Is Company C’s cash flow statement cause for any concern on the part of C’s management or shareholders? Why or why not?

                             ($ millions)

                                                                                                                         A                          B                        C

Net cash flows from operating activities                       (300)                    (300)                    300

Net cash used in investing activities                               (900)                    (30)                    (90)

Net cash from financing activities                                   1,200                    210                     (240)

Cash balance at beginning of year                                      150                    150                        150

Explanation / Answer

Looking at companies A and B, which company would you prefer to own? Why?

Both companies had negative operating cash inflow. But, company - A had gone for huge financial activity, despite of operating losses. Investing activity was made lower than financing activity. This implies, nearly 25% of financial inflow is applied to operating losses.

Even similar things were aslo done by company - B, the range of such activity is within normal limits.

Hence choice should be made for COMPANY - B on comparative basis.

Is Company C’s cash flow statement cause for any concern on the part of C’s management or shareholders? Why or why not?

Company - C had a very good Operating cash inflow. Even the company is able to perform certain financial obligations by payment of dividends, repayment of loans. Even made investment activities as well.There is nothing serious to be concerned by management regarding financial health of the company - c

A B C Net cash flow from Operating activities -300 -300 300 Net cash used in investing activities -900 -30 -90 Net cash from financing activities 1200 210 -240 Change in cash or cash equivalents 0 -120 -30 Cash balance at beginning of year 150 150 150 Cash balance at ending of year 150 30 120

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