Question

Daniel’s Auto Factory manufactures an extensive line of premium auto parts for sale throughout the United States. Its balance sheet for the first quarter of a recent year is presented along with an analysis of selected accounts and transactions:

Daniel’s Auto Factory	March 31	January 1
Assets
Current Assets
Cash	$    921,505	$    528,787
Accounts Receivable	1,602,582	1,463,901
Inventories	2,748,788	2,504,908
Supplies	581,508	224,001
Other	59,219	59,219
Total Current Assets	5,913,602	4,780,816
Long-Term Assets
Equipment	14,010,796	12,929,675
Accumulated Depreciation	-2,744,388	-2,468,084
Equipment (Net)	11,266,408	10,461,591
Land	574,130	624,185
Intangible Assets Net of Amortization $259,641 3/31 & $253,740 1/1	330,359	336,260
Other	100,206	111,588
Total Long-Term Assets	12,271,103	11,533,624
Total Assets	$18,184,705	$16,314,440
Liabilities and Equity
Current Liabilities
Accounts Payable	1,279,455	998,520
Accrued Liabilities	714,473	550,386
Income Tax Payable	11,198	54,229
Short-Term Debt	0	1,000,000
Current Maturities of Long-Term Debt	429,562	134,538
Total Current Liabilities	2,434,688	2,737,673
Long-Term Liabilities
Long-Term Debt	4,193,290	2,183,877
Deferred Income Tax	275,508	275,508
Total Long-Term Liabilities	4,468,798	2,459,385
Total Liabilities	6,903,486	5,197,058
Stockholders’ Equity
Common Stock	91,029	91,029
Additional Paid-in Capital	9,703,985	9,703,985
Treasury Stock	-1,015,899	-1,015,899
Retained Earnings	2,502,104	2,338,267
Total Equity	11,281,219	11,117,382
Total Liabilities & Equity	$18,184,705	$16,314,440

Analysis of Selected Accounts and Transactions:

Net income was $163,837

Depreciation and amortization totaled $282,205

No equipment was sold during the period.

No intangible assets were acquired or sold.

Proceeds from issuance of long-term debt were $4,659,466, and principal payments were $2,355,029

No dividends were declared or paid

Required

Prepare a statement of cash flows using the indirect method for the three month period.

Discuss the strengths and weaknesses Daniel’s Auto Factory based on the statement of cash flows.

Answer 1

Answer 1:

Statement of cash flows using the indirect method for the three month period is as below:

Answer 2:

Strengths and weaknesses Daniel’s Auto Factory based on the statement of cash flows:

Strengths:

1. Purchase of equipment being financed through long term debt

2. Improvement in current ratio through payment of short term debt by raising long term debt

3. Better payables management

Weaknesses:

1. Negative cash flow from Operating Activities

2. Build up of inventories and supplies

3. Increase in receivables

4. Higher cash