BAT-Cash_flow_statement02

aStatement: [|cash_flow_02b.pdf]

Did anyone actually notice that the Income Statement was wrong? Good thing you're not all real investors just yet!

**__Operations:__ **
**Accounts Payable vs. Accounts Receivable:**  From the cash flow statement, we can derive that they spent more money paying off their debt, rather than receiving their debt. This company spent $12,000 paying back debt, while they have received only $4,000 of their existing accounts receivable, 1/3 of what they paid back. Therefore our suggestion for this company is that if possible, to delay paying back their debts until they’ve received more money from their existing customers.

**Merchandise Inventory:**  Merchandise Inventory decreased 47.5% from $40,000 in 2006 to $21,000 in 2007. This loss could mean that the company underestimated the amount of units they were going to sell for the year. This could have been due to newly hired management who are not familiar with the trend of sales at Boulton's Fashion Depot Inc. It could also mean that the sales in 2007 have decreased and the company did not have a need to keep a larger amount of inventory. It could also mean that it was too large to begin with, and has only now returned to a more acceptable level.

**Accumulated Amortization - Building:** The Accumulated amortization for the building has increased by $7200 over the years 2006 - 2007. The Accumulated Amortization for the building compared to the actual cost of the building itself shows that it is a relatively new asset that still has alot of use for the future. However the Amortization is growing at an increasing level per year which could potentially pose problems for the company in the future. To solve this, the company should change the accounting method to the straight-line method. This would lower the expense of amortization and increase profit for the business over a long period of time.

__Investing:__
Since investing activities only used $3,160 of cash, this isn't really a problem area. Most of the activity can be explained by the expropriation of land, and a change in composition of machinery (sale of some, purchase of some others).

 **Purchase of Land and Machinery: **  A concern in the investing activities section is that during the year they not only purchased more land but also new machinery. I believe that it would have been more appropriate to wait until the next year to purchase one the two assets, as this is the only area of the cash flow statement where there was cash used, rather than cash gained. Though the most probable reason for the purchases of both machinery and land is that after having their land expropriated they found it necessary to purchase more land, land that may have been valued higher for the same magnitude of area. Inspite of the company purchasing new machinery the value has decreased to a greater extent. The company purchased quite a bit of machinery in the past year and ended up not using very much of it. Not to mention after calculating the purchase price and lack of amortization, Boulton's Fashion Depot ended up losing quite a bit of money on the machinery. The company couldn't have used the machinery's amortization (how do you "use" amortization?) because the company did not let it amortize long enough, therefore making purchasing this machinery a stupid move. Unless it now allows them to produce something they couldn't before. Perhaps the old machinery was becoming obsolete already.

It does not make sense that the compay would spend $17,000 on new machinery and sell most of it plus a portion of the old machinery in that same year (2007). (A good observation, show how you calculate it so others can fully understand) Buying new machinery did not benefit the company but only brought loss when it was sold later on in the year. The company might have realized that they did not need the machinery, could not afford running it or it was not the right kind when they decided to dispose of it. This could have been the reason for a decrese in merchandise inventory if the merchanside is produced by the machinery.

__Financing:__

 * Dividends:** The company paid a lot of dividends to the shareholders of the company. The cash in their business more than doubled from 2006 to 2007, therefore the company's decision to pay dividends this year was a smart move. Although some companies (being in this situation) might have been hesitant in regards to paying dividends because it can be somewhat risky if you're short on cash. If the company pays off its dividends too early for example, then maybe the in flow of cash would not be as high. Also, the dividends value was relatively high, the company may want to discuss their terms and agreements with their shareholders because it would not hurt re-negotiating. The less dividends they have to pay the more inflow of cash can be possible.

The value of the dividends was relatively high because the Income from continuing operations was only $13 845, when $18 000 of dividends were paid. The amount of profit the company made in 2007 is less than the money spend on dividends therefore it is risky to pay off such large sum of money at once. However, the amount of cash generated by the business was $38,935, so it wasn't as risky as it might seem by just looking at the "Non-cash" profit number.


 * Bonds:** New bonds have been issued by the company in order to raise investments. The company is probably issuing new bonds to raise money for new assets, such as land or machinery. Throughout this time the bondholder earns interest for having purchased, or lended the bonds. It could have also issued bonds to repay current debt, which decreased by $12 000 in the past year. Bonds can also finance operations (though they should do so only in emergencies) within the company, and as mentioned can replace older, more expensive debt.


 * Common Shares:** The company issued shares to raise the company's capital. By issuing shares, owner Boulton is able to access more cash and possibly expand his business. When more shares are issued, the primary owner (Jeff Boulton) in fact now has a smaller stake in his corporation. There are more total shares available, meaning the corporation as a whole has grown in size. For example, if Boulton had owned 60 out of the total 80 shares in the corporation, his stake would be 75%. Later if Boulton decided to raise money by selling 20 more shares, the total number of shares of the corporation is now 100, and Boulton's new stake in the corporation is 60%.

__Ratios (give value and meaning, and cause):__
 **Current Ratio:** The current ratio was determined to be 21, which is an extremely high value. This means that the company is capable of paying of their current debt 21 times. This seems mostly caused by the decrease in accounts receivable and merchandise inventory; which mean the company received some of the money it was owed and sold more than it purchased during the year.

Cash returns on sales indicates how quickly sales can be turned into cash. For Boulton's Fashion Depot Inc. the cash returns on sales is (.10)% which tells us that for every dollar of sales that the company generates, it contributes 10 cents to its net income. Therefore, this is low ratio for a fashion depot and creates higher risk due to the fact that if the company's sales decline next year so will its profit.
 * Cash return on sales:**

**Cash flow to current debt:** 3.8* This ratio states the amount of cash the company generates to pay off the current debt from its operating activities. This company has a high value for cash current debt coverage which means it is generating enough cash to pays its current debts and is fairly stable. 3.8 = ($41,795)/($22,000/2) <span style="color: rgb(40, 1, 1)">**Cash to total debt:** <span style="color: rgb(40, 11, 11)"><span style="color: rgb(20, 16, 35)"><span style="color: rgb(40, 1, 1)"> 2.4 this ratio indicates the amount of cash generated to pay off the total debts fron the companys operating activities. This company has a fairly high value for its cash to total debt coverage and it generates quite an amount from its operating activities to pay the total debt. This also shows that the company is stable. 2.4 = ($41,795)/((5,000+14,000-630+17000)/2) 9.9% * This ratio indicates how quickly a company turns its sales in to cash. However the ratio for cash return on sales for this company is very low and indicated that it is not successful in collecting cash from its customers. The net sales on the incomes statement said that the compny has all sales on account. This is not a good sign for the business. This stops cash from comming in the business. Also that it creates a negative cash flow. ($41,795/$424,000=0.099)
 * Cash Return on sales:** <span style="color: rgb(33, 3, 3)">

5.23* This ratio indicates the cash generated for each share total cash flow balance. The value of the ratio states that the company generates quite an amount of cash from the cash flow for the share holders. (38935/7450=5.23) The cash flow per share is a more useful tool for determining a firms strength. Currently at 5.23 the strength is not as high as it could be, indicating a weakness in the firm.
 * Cash flow per share:**<span style="color: rgb(44, 2, 2)">
 * The higher the better.

**<span style="font-family: Arial,Helvetica,sans-serif">BLOG: Questions **
for the ratios isn't the denominator suppose to be 41795? isn't the number 35650 not including the net income which is suppose to be in the net cash total for operating activites

//This is correct. The proper number for cash from operations is $41,795. Total overall cash flow is $38,935. A number of your ratios also require "average" numbers in the denominator. This requires you to sum the starting value and the ending year's value and then divide by two.//