Alpha (Exhibit 1)

Ques 1. What were the firms major sources of cash? Its major uses of cash?

➢ 1989 - Proceeds from long term debt and increase in short term borrowings were the major
sources cash and majority of this was used as investment in depreciable assets and
payment of long term debts.

➢ 1990 - Here, the major sources were proceeds from the disposal of depreciable and other
assets, proceeds from long term debt and proceeds from the sale of discontinued
operations. Major uses were investment in depreciable assets, payment of long term debt
and decrease in short term borrowings.

➢ 1991 - Major source of cash inflow was proceeds from the disposal of depreciable and other
assets and also net cash flow from operating activities. Majority of this cash was used as
investment in depreciable assets and payment of long term debts.
Beta Corporation (Exhibit 2)
Ques 1. (a) What were the firms major Ques 1. (b) What were the firms major uses
sources of cash? of cash?

➢ In the year 1989, net cash generated from ➢ In the year 1989, most of cash used in
operating activities (particularly cash paying to suppliers and employees and for
received from customers). In addition to capital expenditure.
this, Proceeds of subordinate debt is also a ➢ In the year 1990, most of cash used in
major source of cash. paying to suppliers and employees, capital
➢ In the year 1990, net cash generated from expenditure, Interest paid and Net
operating activities (particularly cash payments under working capital line of
received from customers). credit.
➢ In the year 1991, net cash generated from ➢ In the year 1991, most of cash used in
operating activities (particularly cash paying to suppliers and employees, capital
received from customers). In addition to expenditure, Income tax paid, purchase of
this, proceeds from issuance of common marketable securities and Payment of
stock is also a major source of cash. subordinate debt.
Gamma Corporation (Exhibit 3)
Ques 1. What were the firm’s major sources of cash? Its major uses of cash?

➢ Year 1989 - The major source of Cash was from Operating activities (Due to its Highest
Profit for the 3 years), followed by Issuance of treasury shares and Issuance of Debt. It
was used for purchase of Fixed assets and Purchase of Treasury shares.

➢ Year 1990 - Again, the major source of Cash was from financing activities by issue of
treasury shares and debt. It was used in purchase of Fixed assets and Purchase of
Treasury shares.

➢ Year 1991 - The major source of cash was from Operating activities, Issuance of Treasury
shares and Debt. Cash was used to cover the Operating loss, Purchase of fixed assets,
Kienzle Business, treasury Shares .
Alpha (Exhibit 1)
Ques 2. Was cash flow from operations greater than or less than net income? Explain in
detail the major reasons for the differences between these two figures.

➢ 1989 - The cash flow from operation was greater than net income. Depreciation, Restructuring
and other unusual items (reduces the net income).

➢ 1990 - The cash flow from operation was greater than net income.Depreciation, inventory,
accounts receivable (no actual cash inflow even though revenue is recognized), restructuring
and other unusual items, gain from sale of investments and other assets.

➢ 1991 - The cash flow from operation was greater than net income. Depreciation, restructuring,
inventory, accounts receivable, accounts payable and other current liabilities.
Beta Corporation (Exhibit 2)
Ques 2. Was cash flow from operations greater than or less than net income? Explain in detail the major
reasons for the differences between these two figures.

➢ In the year 1989, cash flow from operations is greater than Net Income. Difference is because
of depreciation & amortization, increase in account receivables, decrease in inventory and
Increase in account payables and accrued expenses.

➢ In the year 1990, cash flow from operations is greater than Net Income. Major difference is
because of depreciation & amortization.

➢ In the year 1991, cash flow from operations is less than Net Income. Difference is because of
Depreciation and amortization, Increase in accounts receivable, Increase in accounts payable
and accrued expenses.
Gamma Corporation (Exhibit 3)
2. Was cash flow from operations greater than or less than net income?
Explain in detail the major reasons for the difference between these two
figures.

➢ Year 1989 - Cash Flow from Operations was Greater than Net Income. Reason being,
addition of Depreciation and amortization, deferred revenue, decrease in prepaid
expenses.

➢ Year 1990 - Cash Flow from Operations was Greater than Net Income. Reason being,
addition of depreciation and amortization, increase in other liabilities and restructuring
reserve, decrease in accounts payable and inventory.

➢ Year 1991 - Cash Flow from Operations was greater than Net Income. Reason being
addition of Depreciation and amortization, increase in restructuring reserve, decrease in
accounts receivable.

Increase in Restructuring Reserve has been a major reason for the years
1990 and 1991.
Alpha (Exhibit 1)
Ques 3. Was the firm able to generate enough cash from operations to pay for all of its
capital expenditure?

➢ 1989 - No, the firm was not able to generate enough cash from operations to pay for all of its
capital expenditure.

➢ 1990 - No, the firm was not able to generate enough cash from operations to pay for all of its
capital expenditure.

➢ 1991 - No, the firm was not able to generate enough cash from operations to pay for all of its
capital expenditure.
Beta Corporation (Exhibit 2)
Ques 3. Was the firm able to generate enough cash from operations to pay for all of its capital expenditure?

➢ In the year 1989, the firm was able to generate enough cash flow from operations to pay for
all its capital expenditure.

➢ In the year 1990, the firm was able to generate enough cash flow from operations to pay for
all its capital expenditure.

➢ In the year 1991, the firm was not able to generate enough cash flow from operations to pay
for all its capital expenditure. Firm issued common stock in that year which helped to take on
heavy cash outflows in this year.
Gamma Corporation (Exhibit 3)
Ques 3. Was the firm able to generate enough cash from operations to pay for all of its
capital expenditures?

➢ Year 1989 - Yes, CFO was greater than capex.

➢ Year 1990 - Yes, CFO was greater than capex.
➢ Year 1991 - Yes, CFO was greater than capex.
Alpha (Exhibit 1)
Ques 4. Did the cash flow from operations cover both the capital expenditures and the
firm's dividend payment if any?

➢ No the cash flow from operations did not cover both, the capital expenditure and the firm's
dividend payment in all three years of its operations.

➢ Since it did not cover both, the capex and dividend payment, question 5 cannot be answered
as it can be inferred that the firm did not have excess cash.
Beta Corporation (Exhibit 2)
Ques 4. Did the cash flow from operations cover both the capital expenditures
and the firm’s dividend payments, if any?

➢ In the year 1989, the cash flow from operation covers the Capital Expenditure. They was
no Dividend Payment in this year

➢ In the year 1990, the cash flow from operations were sufficient to cover capital
expenditure, again there was no dividend payment in this year

➢ In 1991, the capital expenditure was greater than cash flow from Operations, again there
was no dividend payment in this year.
Gamma Corporation (Exhibit 3)

Ques 4. Did the cash flow from operations cover both the capital expenditures and
the firm’s dividend payments, if any?

➢ Year 1989 - Yes the cash flow from operations covered the capital expenditure.
➢ Year 1990 - Yes the cash flow from operations covered the capital expenditure.
➢ Year 1991 - Yes the cash flow from operations covered the capital expenditure.
Alpha (Exhibit 1)
Ques 5 If it did, how did the firm invested its excess cash?

➢ The firm does not have any excess cash

Beta Corporation (Exhibit 2)
Ques 5. If it did, how did the firm invest its excess cash?

➢ In 1989, the excess cash flow is a relatively small amount so it is difficult to determine
where the corporation has actually invested this much amount of cash.

➢ In 1990, the excess cash generated from the operating activity is consumed under
financing activity for payment of working capital line of credit, capital lease obligations
and equipment line of credit.

➢ In 1991, there was no excess cash flow from Operations.

Gamma Corporation (Exhibit 3)
5. If it did, how did the firm invest its excess cash?

➢ In all the years, cash from operations covered the capital expenditure.

➢ The surplus cash was used in buying back its own shares.
Alpha (Exhibit 1)
Ques 6. If not, what were the sources of cash the firm used to pay for the capital
expenditure and/or dividends? Was divided paid despite negative cash flows?

➢ 1989 - Here, the major sources of cash were, proceeds from long term debt, proceeds
from the disposal of depreciable assets. Also there was an increase in short term
borrowings in this period.

➢ Yes divided was paid despite negative cash flows.

➢ 1990 - Proceeds from disposal of depreciable and other assets, proceeds from the sale of
discontinued operations and proceeds from long term debts were the major sources of
cash.

➢ Yes divided was paid despite negative cash flows

➢ 1991 - Proceeds from disposal of depreciable and other assets, proceeds from the sale of
discontinued operations and proceeds from long term debts were the major sources of
cash.
Beta Corporation (Exhibit 2)
Ques 6. If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?

➢ In the year 1989, their was sufficient cash available.

➢ Similarly, in 1990, the cash flows were sufficient.

➢ In 1991, the major source of cash was the proceeds from issuance of common stocks.
Alpha (Exhibit 1)
Ques 7. Were the working capital (Current assets and current liabilities) accounts
other than cash and cash equivalent primary sources of cash, or users of cash?

➢ 1989- No the working capital had very less significance in the operating activity.

➢ 1990- Yes they were significant in the operating activity apart from depreciation &
restructuring.

➢ 1991- Yes they were significant in the operating activity apart from depreciation &
restructuring.
Beta Corporation (Exhibit 2)
Ques 7. Were the working capital (Current assets and current liabilities) accounts
other than cash and cash equivalent primary sources of cash, or users of cash?

➢ In the year 1989, Net Working capital excluding cash and cash equivalents was
decreased by $798,000 which should be considered as sources of cash.

➢ In the year 1990, Net Working capital excluding cash and cash equivalents was increased
by $13,67,000 which should be considered as users of cash.

➢ In the year 1991, Net Working capital excluding cash and cash equivalents was increased
by $67,96,000 which should be considered as users of cash.
Gamma Corporation (Exhibit 3)
7. Were the working capital (current asset and current liability) accounts
other than cash and cash equivalents primarily sources of cash, or users of
cash?

➢ Year 1989 - Current assets were taking up a part of the cash as there was a significant
increase in the accounts receivable and inventory, where as current liability was contributing
an increase in Cash, due to increase in accounts payable and deferred revenues. Collectively
there is a decrease in cash from current assets and current liability.
➢ Year 1990 - Current assets again here are blocking cash flow due to increase in Accounts
receivable and prepaid expenses even though there is a decrease in inventory. On the other
hand current liability is providing cash inflow as there is a increase in Other liabilities and
accounts payable. Collectively, there is a net increase in cash from current assets and
current liability.
➢ Year 1991 - Current assets are providing cash inflow as there is a Decrease in trade
receivables and inventory. Current liabilities are too providing cash inflow. Even though there
is a increase in accounts payable. Collectively, there is a increase in cash flow from current
assets and current liabilities.
Alpha (Exhibit 1)
Ques 8 . What other major items affect cash?

➢ 1989- Investment in depreciable assets, proceeds from long term debt, short term
borrowings.

➢ 1990- Gain from sale of investments & other assets, Inventory, proceeds from sale of
discontinued operations.

➢ 1991- Depreciation, restructuring, accounts receivable & investment in depreciable

assets.
Gamma Corporation (Exhibit 3)
8. What other major items affected cash flows?

➢ Year 1989 - The cash was used in Trade credit, Purchase of fixed assets, payments made
to retire debt and purchase of treasury shares.

➢ Year 1990 - The cash was used in Trade credit, prepaid expenses, purchase of fixed
assets, purchase of treasury shares

➢ Year 1991 - Cash was used in pay the creditors, buy fixed assets, Kienzle Business,
payments made to retire debt and purchase treasury shares.
9 What was the trend in:Net income

➢ The year 1989 recorded the highest Net Income among the three years, despite heavy investments in
fixed assets and purchase of treasury shares. In the year 1990, the net income fell by 93% even without
any significant improve in cash outflows. The year 1991 recorded a heavy loss, even when the cash
outflow from investing and financing activities was not greater than the previous two years, making us
assume that it has to do something with decline in sales or increase in other operating costs.
Alpha (Exhibit 1)
Ques 9. Trend in Net income -

➢ Decreased from 1989 to 1990 and then increased in 1991 from 1990. Overall Net Income
is Negative.

Ques 10. Trend in Cash flow from operations -

➢ Cash flow from operations has been on an increasing trend in these three years.

Ques 11. Trend in Capital Expenditures -

➢ Capex is decreasing in these three years.

Ques 12. Trend in Dividends -

➢ There has been a decrease in dividend paid in the year 1990 from 1989 while no
dividend was paid in the year 1991.
Beta Corporation (Exhibit 2)
Ques 9. What was the trend in Net Income?

➢ The net income increases rapidly from 1989 to 1990, reason being the revenues in 1990
were significantly higher than previous year.Whereas, the increasing trend was less rapid
from 1990 to 1991.

Ques 10. What was the trend in Cash flow from operations?

➢ As the total revenues increased in the year 1990 the cash flow from operations shows an
increasing trend from 1989 to 1990.However it decreased significantly in 1991 because of
higher payments to creditors and higher amount of income tax as well.
Gamma Corporation (Exhibit 3)
10. What was the trend in Cash flow from (continuing) operations?

➢ Cash flow from operations was the highest in the year 1989, later in the year 1990, there
was a slight decrease in its cash flow from operations. The year 1991 showed a drastic
decline in cash flow from operations.

11. What was the trend in Capital expenditures?

➢ From the year 1989 to year 1991, the capital expenditure has been decreasing year by year. The
company incurred a loss in the year 1991, the same year when it Acquired Kienzle.
Beta Corporation (Exhibit 2)
Ques 11. What was the trend in Capital Expenditure?

➢ The capital expenditure shows an increasing trend over the years.As the corporation’s
revenues grow significantly apart from that it also received proceeds from issuance of
common stock in 1991, the excess money is then invested for further expansion.

Ques 12. What was the trend in Dividends?

➢ Beta corporation has not paid any dividend over the span of three years.
Alpha (Exhibit 1)
Ques 13. Trend in net borrowings (Proceeds less payment of short and long term
debt) -

➢ Net borrowings has increased in 1990 from 1989 and decreased in the year 1991 from
1990.

Ques 14. Trend in Working Capital accounts -

➢ Decreased from 1989 to 1990 and then increased from 1990 to 1991.
Beta Corporation (Exhibit 2)
Ques 13. What was the trend in net borrowings (Proceeds less payment of short and
long term debt) ?

➢ Net borrowings have been continuously declining. In the Year 1989, Company’s Net borrowings were
$44,00,000 whereas in the Year 1990, company didn’t borrow any amount. In the year 1991, Beta
Corporation repaid $50,00,000 to its lenders.

Ques 14. What was the trend in Working Capital Accounts?

➢ Net change in working capital account is (-)$798,000, (+)$13,67,000 and (+)$67,96,000

in the year 1989, 1990 and 1991 respectively. We can see that Working capital has been
improved by 271% in the year 1990 and 397% in the year 1991.

Thus, we can say that Working Capital Account has been improving over the years.
Gamma Corporation (Exhibit 3)
13. What was the trend in Net borrowing (proceeds less payments of short- and
long-term debt)?

➢ Inferring from the payments to retire debt section, there has been huge payments, which
are comparatively more than debt taken in the respective years.
➢ In the same period purchase of treasury shares were significantly high in the years,
though they showed a negative trend.
➢ Hence in 1989, there was high cash outflow, because of huge debt payments and
purchase of treasury shares.
➢ But in 1990, there was a inflow of cash which was influenced by high issuance of treasury
shares and comparatively less payments made.
➢ Again in 1991, there were huge debt payments and purchase of treasury shares, which
led to cash outflow.
Gamma Corporation (Exhibit 3)
14. What was the trend in Working capital accounts?

➢ From the given three years, It is clearly visible that the money in working capital is
being pulled out, as the cash used by current liabilities and current assets
combined together was negative in the year 1989 and becomes positive by the
year 1991.
Alpha (Exhibit 1)
Ques 15. Based on the evidence in the statement of Cash Flows alone, What is your
assessment of the financial strength of this business?

➢ There is an increasing trend from 1990-1991 in net income. The trend in CFO is steadily
increasing across the 3-year span. Although currently CFO does not cover Capex, the
decreasing trend in Capex shows that the company is becoming more stable. The
working capital shows an increasing trend, indicating that the company has the ability to
pay back its current liabilities. The increasing trend in CFO shows that the company could
sustain this source of funding. Since major sources of funding have been from the
disposal of assets or the sale of discontinued operations, perhaps the company is trying
to narrow down its focus on only profitable operations, which is suggested by the
increasing trend in net income. The company looks not in big trouble from the cashflow
point of view. However other financial statements are also needed to be analysed for
coming to a definite conclusion.
Beta Corporation (Exhibit 2)
Ques 15. Based on the evidence in the Statement of Cash Flows alone, what is your
assessment of the financial strength of this business ? Why ?

➢ The net income of Beta Corporation shows an increasing trend which means that
corporation is increasing its foothold in the business. The Cash Flow from operations
increase rapidly from 1989 to 1990 but shows a decreasing trend thereafter because of
high payment to creditor and income tax as well. However the cash received from
customers is showing an increasing trend which shows better productivity. The total
borrowings decreased significantly in the year 1991 and it has been repaid by the
proceeds from issuance of the stocks. The working capital also show an increasing trend
which mean the company is more capable to pay-off its obligations because it has a
larger proportion of short asset value relative to the value of its short time liabilities.

It looks like company is getting stable in the market and one can expect a steady growth
in the future.
Gamma Corporation (Exhibit 3)
Ques 15. Based on the evidence in the Statement of Cash Flows alone, what is your
assessment of the financial strength of this business? Why?

➢ It is evident from the cash flow statement for the given 3 years, that their net income is decreasing,
ultimately leading heavy losses in the year 1991. It is also seen that during the same period they
acquired a Kienzle Business, which can mean they are expanding/Diversifying to new businesses. Also
we can see there is an increase in restructuring reserve, that means their current financial leverage is
not paying off, and hence they are appropriating into reserves. This can be seen through consistent
increase in the the purchase of treasury stocks. From this we can infer that their share price of their
stocks is going down and at the same time they are in need of cash. Hence they are re-selling their
treasury stocks.
Alpha (Exhibit 1)
Ques 16. Which was the method for cash flow statement preperation?

➢ Alpha -There was indirect method followed.

➢ Beta – Direct

➢ Gama - Indirect
What happened Actually?

● Alpha Corporation is Wang Corporation which filed bankruptcy protection in August 1992.

● Beta Corporation is Proteon Corporation which was recognised as rapidly growing high-tech company
and had made an IPO in June.

● Gama Corporation is Digital Equipment Corporation a large historically profitable but currently
struggling company.
Thank
You!