You have just been hired as a financial analyst for Barrington Industries. Unfor
ID: 2791789 • Letter: Y
Question
You have just been hired as a financial analyst for Barrington 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 learned that annual depreciation expense for the year is $460,000; 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? Recreate the firm's cash flow statement to arrive at your answer. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar, if necessary.
Explanation / Answer
cash flow statement
Indirect Method
cash flow from operating activities
net income
5000000
add depreciation
460000
add interest payment on bonds
60000
changes in working capital
0
cash flow from operating activities
5520000
cash flow from investing activities
purchase of equipment
-5500000
cash flow from financing activities
240000
payment of dividend
-700000
payment of interest on bonds
-60000
issuance from proceeds of bonds
1000000
net cash flow during the year
260000
beginning cash balance
100000
year end cash balance
360000
cash flow statement
Indirect Method
cash flow from operating activities
net income
5000000
add depreciation
460000
add interest payment on bonds
60000
changes in working capital
0
cash flow from operating activities
5520000
cash flow from investing activities
purchase of equipment
-5500000
cash flow from financing activities
240000
payment of dividend
-700000
payment of interest on bonds
-60000
issuance from proceeds of bonds
1000000
net cash flow during the year
260000
beginning cash balance
100000
year end cash balance
360000
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