Chemco Coatings Case Study
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Question 1: Using the given income statement and balance sheet data, Ive generated a cash-based income statement for Chem-Co for 2005 below.
Chem-Co
Jennifer Haggerty
CASH BASED INCOME STATEMENT
$ 1,000,000
Cash Flow Impact
Net sales
Source
Revenue
Change in accounts receivable
(113)
Asset Increase
Cash receipts from sales
Cost of goods sold
(680)
Expense
Change in inventory
Asset Increase
Change in accounts payable
Source
Liability Increase
Cash purchases
(702)
Cash margin
Total operating expenses
(150)
Expense
Depreciation & amortization
Source
Noncash Expense
Change in prepaid expenses
Source
Asset Decrease
Change in accruals
Source
Liability Increase
Change in other current assets & liab.
Cash operating expenses
(114)
Cash operating profit
(68)
Interest on marketable securities
Source
Revenue
Income on long term investments
All other expenses & income (net)
Cash before interest & taxes
(62)
Interest expense – Bank notes
Interest expense – Term notes and LTD
Expense
Income taxes reported
Expense
Change in income tax payable
Source
Liability Increase
Change in deferred income taxes
Cash flow from operations (CFO)
(84)
Capital exp. and leasehold improvements
Use
Asset Increase
Change in long-term investments
Change in intangible assets
Use
Asset Increase
Change in other noncurrent assets
Cash Used for Investments
(37)
Payment for last periods CM Term note
Payment for last periods CMLTD
Payment For Financing
Dividends paid (DIV)
Payments for financing
Cash before external financing
(130)
Change in short-term bank debt
Source
Liability Increase
Change in term notes & EOP CM term notes
Liability Decrease
Change in LT debt + EOP CMLTD
Change in stock & surplus
Change in preferred stock
Change in treasury and other equities
Change in other noncurrent liabilities
External financing
Extraordinary exp. and cha. In acct. prin.
Current period accounting adjustment
Asset Decrease
Change in cash & mktbl securities
(14)
Actual change in cash
(24)
Question 2: Calculations are in the table below.
Days accounts receivable 2004: 56.21 days
Days accounts receivable 2005: 91.14 days
Inventory turnover 2004: 40.69 days OR 8.97 times
Inventory turnover 2005: 55.82 days OR 6.54 times
Days accounts payable 2004: 19.98 days
Days accounts payable 2005: 25.38 days
Determine if the use/source of cash in working capital was a result of sales growth, credit policy, inventory policy, or trade credit policy. Did these turnover ratios improve or deteriorate? What was the resulting impact on cash flow?
Based on the numbers in the previous charts, it appears that the use of cash was a result of a mixture of several variables to include sales growth, credit policy (payables and receivables), and inventory policy. The companys sales did increase 30% from 2004 to 2005 which also brought additional uses of cash. We also saw many of their ratios deteriorate during this year, mostly, I assume, due to credit policy. They are allowing their receivables to be paid over a longer term in 2005 than in 2004; this leapt up from 56.21 days in 2004 to 91.14 days in 2005. It is not stated whether they chose to allow this extension or if there are issues with collections on receivables. Possibly the industry is deteriorating. (Additional knowledge of this industry in their geographic region during this time period would be necessary.) Additionally, they are turning over their inventory slower than in 2004 Ð- every 56 days in 2005 vs. every 41 days in 2004. This could be because their inventory mix changed when they bought the pool manufacturer.
All of these factors are uses of cash and are directly impacting the availability of working capital which deteriorated in 2005. The resulting impact on cash flow was (24).
Question 3: Interpret the figures by