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Finance Problem Set 1

Salza Technology Corporation's cash and marketable securities declined between 2015 and 2016 despite an increase in sales. To understand the reason, the CEO has asked you to prepare a statement of cash flows for 2016. Itsar Products Company has projected monthly cash receipts and disbursements for the next year and wants to maintain a $10,000 minimum cash balance. You need to determine if Itsar will have a cash need and, if so, when the maximum need will occur and if it can be repaid within the year.

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Hamid Yaghoubi
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742 views4 pages

Finance Problem Set 1

Salza Technology Corporation's cash and marketable securities declined between 2015 and 2016 despite an increase in sales. To understand the reason, the CEO has asked you to prepare a statement of cash flows for 2016. Itsar Products Company has projected monthly cash receipts and disbursements for the next year and wants to maintain a $10,000 minimum cash balance. You need to determine if Itsar will have a cash need and, if so, when the maximum need will occur and if it can be repaid within the year.

Uploaded by

Hamid Yaghoubi
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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Finance Problem Set 1 Summer 2020

Cash Flow
EF Chapter 4
1. Salza Technology Corporation increased its sales from $375,000 in 2015 to $450,000 in year
2016 as is shown in the firm’s income statements presented below. LeAnn Sands, chief executive
officer (CEO) and founder of the firm expressed concern that the cash account and the firm’s
marketable securities declined substantially between 2015 and 2016. Salza’s complete balance
sheets are also shown below. Ms. Sands is seeking your assistance in the preparation of a
statement of cash flows for Salza Technology.

SALZA TECHNOLOGY CORPORATION

Annual Income Statements as of December 31 (in $ Thousands)


2015 2016
Net sales $375 $450
Less: Cost of goods sold -225 -270
Gross profit 150 180
Less: Operating expenses -46 -46
Less: Depreciation -25 -30
Less: Interest -4 -4
Income before taxes 75 100
Less: Income taxes - 20 -30
Net income $55 $70
Cash dividends $17 $20

Balance Sheets as of December 31 (in $ Thousands)


201 2016
5
Cash $ 39 $ 16
Accounts receivable 50 80
Inventories 151 204
Total current assets 240 300
Gross fixed assets 200 290
Less accumulated -95 -125
depreciation
Net fixed assets 105 165
Total assets $345 $465

Accounts payable $ 30 $ 45
Bank loan 20 27
Accrued liabilities 10 23
Total current liabilities 60 95
Long-term debt 15 15
Common stock 85 120
Retained earnings 185 235
Total liabilities and equity $345 $465
A. Prepare a statement of cash flows for 2016 for the Salza Technology Corporation.

Cash Flow Statement


2016
Cash from Operating Activities
Net income
Deprecation
Increase in accounts receivable
Increase in inventories
Increase in accounts payable
Increase in accrued liabilities
Net from Operating Activities

Cash from Investing Activities


Increase in gross fixed assets

Cash from Financing Activities


Increase in bank loan
Increase in common stock
Cash dividends paid
Net from financing Activities

Total net Cash Increase (decrease)

Cash at Beginning of Period


Total net Cash Increase (decrease)
Cash at End of Period

B. Provide a brief description of what happened in terms of cash flows (both inflows and
outflows) for Salza between years 2015 and 2016.

C. Use your calculations from Part A for cash flows from operating and investing activities to
indicate the extent to which Salza was building or burning cash in 2016.
D. Convert the 2016 annual cash build or cash burn to a monthly rate. If cash flow activities
relating to operations and investing for 2016 continue into 2017, indicate: (1) how long it
will be before Salza runs out of cash (if Salza is burning cash), or (2) the expected 2017 year-
end cash account balance if Salza is building cash. Assume no changes in cash flows from
financing activities in 2017 for calculation purposes.

EF Chapter 6
2. The Itsar Products Company has made the following monthly estimates of cash receipts and cash
disbursements when preparing cash budgets for the next twelve months. Itsar Products has
beginning cash on hand of $10,000 and wants to maintain this minimum cash level throughout
the next year.

Cash Cash
Month Receipts Disbursements
January $100,000 $100,000
February $90,000 $110,000
March $80,000 $110,000
April $100,000 $150,000
May $120,000 $180,000
June $160,000 $180,000
July $200,000 $180,000
August $250,000 $180,000
September $250,000 $150,000
October $200,000 $110,000
November $140,000 $100,000
December $100,000 $100,000

A. Determine whether Itsar Products will have a cash need during the next year.

B. If Itsar Products has a cash need, indicate the month when the need will begin and determine the
month and amount when the maximum need will occur.
C. Determine whether the cash need (if any) can be repaid within the next year.

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