Question

Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

Answer 1

The correct question is:

Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

Select one:

a. ​The company cut its dividend.

b. ​The company made large investments in fixed assets.

c. ​The company sold a division and received cash in return.

d. ​The company issued new common stock.

e. ​The company issued new long-term debt.

Answer:

b. ​The company made large investments in fixed assets.

Explanation:

The operating cash if invested in fixed assets will increase cash flow in the business. Since the cash is not used in production within that period (was invested in long term asset), it will not be represented as cash flow for this period. So reported cash will be low.

Companies invest in long term assets that will produce returns in to future, so cash flow from this investment will appear at a future date.

Answer 2

Answer:

This question is incomplete. The complete question is as follows:

​Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

Select one:

a. ​The company cut its dividend.

b. ​The company made large investments in fixed assets.

c. ​The company sold a division and received cash in return.

d. ​The company issued new common stock.

e. ​The company issued new long-term debt

The answer is: b

Explanation:

This question is focused on the statement of cash flows for Howe Industries. The statement of cash flows comprises three components: financing activities, operational activities and investing activities. It depicts the cash flowing out of the company and the cash flowing into the company as a result of these activities. The dividend cut would fall under operating activities and the cut would have a positive effect, increasing the cash flows. The proceeds from the sale of the division (investing activity), issuance of common stock (financing activity) as well long-term debt (financing activity) would all increase the cash balance. Therefore, the large investments in fixed assets which would require large capital outlays would be the most likely reason why Howe Industries has a decreased cash balance on its balance sheet.