Question

CA5-5 WRITING (Cash Flow Analysis) The partner in charge of the Kappeler Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the cash flow statement for the year ended December 31, 2017. Because he must leave on an emergency, he asks you to finish the letter by explaining: (1) the disparity between net income and cash flow, (2) the importance of operating cash flow, (3) the renewable source(s) of cash flow, and (4) possible suggestions to improve the cash position.
KAPPELER CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income
$ 100,000â

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
$â10,000â

Amortization expense
1,000â

Loss on sale of fixed assets
5,000â

Increase in accounts receivable (net)
(40,000)

Increase in inventory
(35,000)

Decrease in accounts payable
â(41,000)

â(100,000)

Net cash provided by operating activities â0â
Cash flows from investing activities
Sale of plant assets
25,000â

Purchase of equipment
(100,000)

Purchase of land
â(200,000)

Net cash used by investing activities
(275,000)

Cash flows from financing activities
Payment of dividends
(10,000)

Redemption of bonds
â(100,000)

Net cash used by financing activities
â(110,000)

Net decrease in cash
(385,000)

Cash balance, January 1, 2017
ââ400,000â

Cash balance, December 31, 2017
$ââ15,000â
ââ â ââââââ

Date

President Kappeler, CEO
Kappeler Corporation
125 Wall Street
Middleton, Kansas 67458

Dear Mr. Kappeler:

I have good news and bad news about the financial statements for the year ended December 31, 2017. The good news is that net income of $100,000 is close to what we predicted in the strategic plan last year, indicating strong performance this year. The bad news is that the cash balance is seriously low. Enclosed is the Statement of Cash Flows, which best illustrates how both of these situations occurred simultaneously â¦

Instructions

Complete the letter to the CEO, including the four components requested by your boss.

Answer 1

Answer:

Explanation statement of cash flow for the year ended December 31.2017

Cash flow from operating activities

Net income                                              100,000

Add back depreciation          10,000

Add back amortization              1,000

Add back loss on asset sales   5,000

Increase in account receivable(40,000)

Increase in inventory                 (35,000)

Decrease in accounts payable (41,000)   (100,000)

Net cash from operating activities                  0

Cash flow from investing activities

Sales of land                                  25,000

Purchase of equipment                (100,000)

Purchase of Land                          (200,000)

Net cash from investing activities                     (275,000)

Cash from financing activities

Payment of dividends                    (10,000)

Redemption of bonds                    (100,000)

Bet cash from financing activities                       (110,000)

Net decrease in Cash                                         ( 385,000)    

Cash balance in January 1, 2017                         400,000

Cash balance in December 31 , 2017                    15,000

Workings

1)

The disparity between the net income and the cash floe are as a result loss of cash to operating activities as a result of  cash tied down to increase in receivable and inventory and also to an increase in payable leading to an overall cash generated by operating activities of 0

Moreover , a larger portion (300,000) of the opening cash balance(400,000) for the year was used in acquiring land and equipment and also 100,000 used in the redemption of bond. , even though this reduced the interest expense and improve equity , yet it was a big blow to the cash flow.

2)

The importance of cash flow is that it helps to analyse and monitor cash movement and cash available for the purpose of business activities towards liquidity and long term solvency.

3)

Renewable sources of cash flow are generated from the company's operating activities as the cash used for the financing and operating activities are generated from this medium.

4)

Suggestion to improve cash flow for Kappler are

1. Reduce the level of inventory held
2. Negotiate with the account payable for a longer trade payable payment period
3. Reduce the trade receivable collection period
4. Payment of dividends and redemption of bonds van be suspended till alter date when adequate cash is available
5. it can also negotiate for external sources of financing