Question

You have just been hired as a financial analyst for Barrington Industries. Unfortunately, company headquarters (where all of the firm's records are kept) has been destroyed by fire. So, your first job will be to recreate the firm's cash flow statement for the year just ended. The firm had $100,000 in the bank at the end of the prior year, and its working capital accounts except cash remained constant during the year. It earned $5 million in net income during the year but paid $700,000 in dividends to common shareholders. Throughout the year, the firm purchased $5.5 million of machinery that was needed for a new project. You have just spoken to the firm's accountants and learned that annual depreciation expense for the year is $460,000; however, the purchase price for the machinery represents additions to property, plant, and equipment before depreciation. Finally, you have determined that the only financing done by the firm was to issue long-term debt of $1 million at a 6% interest rate. What was the firm's end-of-year cash balance? Recreate the firm's cash flow statement to arrive at your answer. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar, if necessary.

Answer 1

Cash Flow Statement of Barrington Industries

   Particulars Amount($) Amount($)

A. Cash flow from operating activities

Net income 5000000

Add: Depreciation (being non cash item) 460000

Net cash flows from operating activities 5460000

B. Cash flow from investing activities

Purchase of machinery    5500000

Net cash flows from investing activities    (5500000)

C. Cash flows from financing activities

Proceeds from issue of debt 1000000

Less: Interest on debt (@6% of debt)     (60000)

Net cash flows from financing activities 940000

Net increase/decrease in cash (A+B+C) 900000

Cash at beginning 100000

Cash at end   1000000