CORPORATE FINANCE

REI, second year, first term, 2015-2016

Cash-Flow Statement Analysis
1. Show the impact of the next transactions on Current Assets, Net income and Cash-Flow
(+ means an increase, - means a decrease, 0 means no impact)
Current
assets

Net Income

Cash-flow

Issuing new common stocks (and cashing in the

money for it)
Selling goods with payment
Paying income tax for the previous year
Selling fixed assets for an amount smaller than
its book value
Selling goods on credit
Paying suppliers for the previous acquisitions
Registering and paying dividends
Getting cash from a short-term bank credit
Selling short/term receivables for a price lower
than their book value
Salary payment
Issuing short term promissory notes for
commercial creditors
Issuing bonds payable with a maturity of 10
years
Selling an asset completely depreciated
Cashing in Accounts receivable
Buying an equipment with up-front payment
Buying goods on credit
Registering into accounts new taxes to be paid
2. Classify each of the following transactions as an operating activity, an investing activity, or
financing activity. Also indicate whether the activity is a source of cash or a use of cash.
1) A plant was sold for $550,000.
2) A profit of $75,000 was reported.
3) Long-term bonds were retired.
4) Cash dividends of $420,000 were paid.
5) Four hundred thousand shares of preferred stock were sold.

6) A new high-tech robotics was purchased.

7) A long-term note payable was issued.
8) A 50 percent interest in a company was purchased.
9) A loss for the year was reported.
10) Additional common stock was sold.
3. Classify each transaction in the first three columns by its correct cash flow activity:
Transaction
Operating

Type of activity
Investing

Financing

a) Issued common stock for cash

b) Purchased treasury stock
c) Paid an account payable
d) Declared a cash dividend
e) Issued a bond payable
f) Purchased land
g) Sold a machine at book value
Rules to remember:
Any increase in assets and any decrease in liabilities and equity means we use cash (pay out)
Any decrease in assets and any increase in liabilities and equity means we generate cash
(cash in)
Quick quiz:
a)
b)
c)
d)

What are the differences between accounting profit and cash flow?
What is the effect of non-cash expenses on cash flow?
What are the effects of changes in net working capital on operating cash flow?
Which state of affairs of the company leads to profit and negative cash flow for its
shareholders?
e) What is the difference between the operating cash flow and the total cash flow of the
firm?
4. Multiple choice questions:
1). Which of the following changes in working capital will result in a decrease in cash flows?
a) Decrease in accounts payable;
b) Decrease in inventories;
c) Decrease in accounts receivable;
d) Increase in other current liabilities;
2). Which of the following would not be considered a use of cash?
a) Dividends;
b) Decreased accounts payable;
c) Increased accounts receivable;
d) Increased accrual wages;
3). Which of the following statements about depreciation is correct?
a) Depreciation is subtracted from EBIT to calculate net income.
2

b) When depreciation expense is incurred, cash balances are reduced.

c) Depreciation expense reduces the market value of assets.
d) When depreciation tax shield is incurred, cash balances are increased.
5. Prepare the cash flow statement using the data for the following company:
Balance sheet
Cash
Marketable securities
Accounts receivable
Inventories
Prepaid expenses
Total Current Assets
Gross Fixed Assets
less: accumulated depreciation
Net Fixed Assets
Total Assets
Notes Payable
Accounts Payable
Dividend payable
Accruals

2013
500
1000
6000
4500
550
12550
25000
7500
17500
30050
2000
8000
0
1000

2014
100
0
10000
9350
400
19850
30000
9000
21000
40850
4000
12200
60
2500

Total Current Liabilities

11000

18760

Long-term debt
Common stock
Accumulated Retained
Earnings
Total Equity
Total liabilities and Equity

9000
10000
50

12000
10000
90

10050
30050

10090
40850

Income statement
Sales
Cost of goods sold
Rent expenses
Salaries
Advertising expenses
EBITDA
Depreciation
EBIT
Interest expenses
EBT
Income tax (40%)
Net Income
Statement of Retained
Earnings
Beginning balance,
January 1, 2014
Net income
Dividend declared
Ending balance,
December 31, 2014

2014
60000
45000
6000
5000
1500
2500
1500
1000
800
200
80
120

50
120
80
90

Cash flow = Cash inflows Cash outflows

a. Determine the operating cash flow, investment cash flow and financing cash flow for
2013.
b. What is the tax shield the company has got as a result of the increase in depreciation,
as well as in interest expenses? (Depreciation and interest expenses in 2013 were
1250 and 600).
c. How much the operating cash flow has increased because of tax shields surplus the
company has got?

6. Create the Cash Flow Statement for the following financial situation:

Balance Sheet:
Cash
Accounts receivable
Inventories
Buildings & Equipment (Gross Value)
Less Fixed assets depreciation
Buildings & Equipment (Net Value)
Land

December
31st 2013
30.000
250.000
100.000
168.000
33.000
135.000
37000

December
31st 2014
15.000
230.000
170.000
192.000
42.000
150.000
41000

2.000
32.000
45.000
310.000
50.000
113.000

2.000
39.000
50.000
327.000
50.000
138.000

Taxes payables
Notes Payable
Accounts Payable
Bonds
Common Stock
Accumulated Retained Earnings

Income Statement:
Operating Revenues
Cost of Goods Sold
Selling, general and administrative expenses
Depreciation
Operating Income

920.000 RON
(710.000) RON
(98.000) RON
(9.000) RON
103.000 RON

Other Revenue
Other Expenses (except Interest)

0 RON
0 RON

Earnings Before Interest And Taxes (EBIT)

Interest
Earnings Before Taxes (EBT)
Corporate Income Tax (50%)

103.000 RON
(43.000) RON
60.000 RON
(30.000) RON

Net Income

30.000 RON