Comparable balance sheets are presented below:

Dec. 31, 2015 Dec. 31, 2014

Assets

Cash 1.2 1.9

Accounts Receivable 0.4 0.3

Inventory 1.3 1.0

Property, Plant & Equipmen 6.0 3.0

Less: Accumulated Depreciation (0.8) (0.4)

8.1 5.8

Liabilities & Stockholder's Equity

Accounts Payable 2.6 2.1

Dividends Payable - -

Bonds Payable 4.4 2.8

Common Stock, $1 Par Value 0.2 0.1

Paid-in Capital in Excess of Par Value 3.2 2.2

Retained Earnings (2.3) (1.4)

8.1 5.8

Additional Information:

1. The change in PP&E represent cash expenditures for a new factory

2. There were no disposals of PP&E during the year

3. There were no dividends declared during the year

4. The common stock was issued for cash

5. A review of the income statement noted a gross profit margin of

20% and Research & Development costs of $0.7 for the year

Required:

1. Prepare a statement of cash flows using the indirect method

2. Is the operating cash flow sustainable?

3. What are the major sources and uses of cash?

4. How are the operations being financed? Through earnings or other means?

Do you agree with this strtegy?

5. No dividends were declared. Why?

6. Why might the company be losing so much money? Do you agree with their strategy?

7. What are the risks to the company going forward?

Note that when the operating cash flow is aided by profitable operations, it may not be sustainable. e.g. operating cash gotten from an outsized reduction in accounts receivable cannot be kept or handled.

The major sources and uses of cash are:

Operating
Investing
Financing

Operations are being financed via the day to day normal operations that brings income. Example are cash receipts from revenue and cash shared to pay for expenses.

The risks of a company going forward includes:

Fraud
employee misconduct
Misappropriations of funds, etc.

Learn more about cash flows from

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