BAT-Cash_flow_statement01

=Cash Flow Statements=

Assess
Using the assigned Cash Flow Statement below, add your assessment of this company's strength in the sections below. Be sure to add to any existing comments to provide as detailed a study guide as possible.

[|cash flow 01b.pdf]

Below, state the areas of concern, their direct cause, and their likely potential "root" cause(s). Suggest solutions. Post any general questions to your classmates at the bottom if you wish.



Operations
The company could have held back on buying prepaid insurance, since they already had $2000 in the accounting. It would not have made a major impact, but at least they would have $500 more in cash which would allow the company to have a cash total of $2380. The company could have been placing money into a prepaid account for cautious reasons, but if so much cash was already going out then they should not have put in money for one year. This can also be a sign that the major loss in cash in the current year might only be a rare event since they are still continuously placing money into a prepaid account.
 * Prepaid Insurance:**

The company is selling a lot of goods on account, which decreases the cash in the company because it keeps on buying new inventory without collecting money from its customers. There is no inflow of cash in the business, only outflow. This shows many characteristics of the A/R department that Boulton's Fashion Depot has hired,
 * Accounts Receivable:**
 * 1) There is obviously some incompetence located in the A/R department,
 * 2) The managerial skills are not at preferable levels,
 * 3) Managers are giving credit to customers who cannot pay back what they owe,
 * 4) Company isn't collecting their receivables fast enough.

This is not a good situation to be in when looking at it through a business perspective. The CEO should consider more efficient highly competent people in the A/R department because it is crucial to the success of the business. Not only does this effect the cash flow of the business, but it effects the business' functions overall. If debts are not paid money cannot be made, if money cannot be made the business will be incapable of continuing operations.

The inventory at the end of year 2008 was more than three times the inventory at the end of 2007. This might have been the result of ordering extra inventory, due to a change in the management (hiring new staff). The over purchasing of the merchandise could also be linked to the machinery which was purchased (with a heavy pocket). This has expanded the company over the fiscal year, which could be considered a good or bad thing.
 * Merchandise Inventory:**
 * Does buying tons of inventory mean immediate expansion? It is not probable that the inventory is mostly likely sitting in boxes at the back of the store. In another words, it is not being used as operating assets to generate the company's revenues. it probably hints some future company decision, or mere employee stupidity. Buying a lot of inventory is not necessarily bad, unless of course the company purchased excessive amounts, much of which cannot be liquidated into cash quickly. This might result the company's bankruptcy.

Investing
One concern is the impact of purchasing machinery, and how this purchase affected their cash flow so greatly. One direct cause of the effect brought on by the purchase of machinery is that the majority of the machine was paid for with cash rather than paying with share proceeds, whose effect on cash flow would have been neutralized by the addition of "common shares issued" in the financing section. The possible "root" cause of this may be that the company was unable to receive a larger amount of share proceeds, possibly due to being known as a bad investment. A possible solution to this would be to find a way to appeal to investors, and show them that the company truly is a good investment, and that this was just a bad year. Boulton's Fashion Depot has quite a bit of machinery purchased with cash, this can be addressed in a positive and negative manner. Firstly, if there is brand new equipment being used chances are that the company will attract more investors, and successfully expand their company, or this machinery that they purchased will allow more options in the manufacturing process.
 * Machinery:**

Financing
Another issue is the increase in dividends declared and paid. Dividends are the distribution of a company's wealth to selected shareholders with the purchase of stock or shares within the company. In this case, as a result of the significant increase in common shares in 2008, more dividends are paid out to the shareholders which affects the amount of cash needed to cover the cost to pay off the shareholders. A possible solution for the company is to change their dividend policies with the Board of Directors to Eliminate Dividend payout.
 * Dividends Declared and Paid:**
 * This also poses a difficulty to the company when considering it's liquidity. It has 'negative' cash, and now has to pay out more dividends as a result of more shares. ACHTUNG, as Mr. Boulton would say, at it's currents state the company is appearing as if it's 'going to go under'.

Ratios tell me:
This ratio provides an excellent view pertaining to the health of a company, and is often looked at by investors. It provides a quick and easy 'reading' on whether or not the company is strong and sustainable. Profits per share can be manipulated by the "Achtungen" that affect profit but not cash, hence they can be misleading. Here, with the cash flow per share being negative 2.63 dollars one can see that this company is losing the money of its investors. As such, one may logically extrapolate that the future of this company is 'on the crossroads'; for once out of cash it is difficult to acquire loans (since you can't pay them off) and continue normal business operations. Such a difficulty is caused by various elements such as buying to much inventory or too much prepaid insurance. This can be possible if the management within this company is poorly trained. However it is also a possibility that the company might be planning a rapid expansion, which would explain some of the regularly unwise decisions that appear to have been made by the management.
 * Cash Flow Ratio:**

How easy would it be to reverse to halt the overuse of case for this company?

Cash flow per share = Cash Flow / Common Shares Issued = $ (2.63)
 * Guys please notice that the file posted by Mr. Boulton already has the calculated ratios to make our lives simpler
 * In addition, the higher the ratio is, the better the company is performing, and vise versa.

BLOG: General Questions:
How do we assess the financing section of the cash flow statement?

//You're looking to see what is being borrow, or repaid, (stock issues) and dividends. This gives an indication of how the company is raising money, (which leads to the question of why it's doing it) and it also allows you to decide if you are happy that it's using debt instead of shares to raise that money.//

"Discuss the reason for key differences in accrual numbers versus cash numbers."- what does that mean?

//Accrual numbers mean using GAAPs. That is, revenue is recognized when it is earned, not when cash changes hands; it follows Revenue Recognition Principle. Cash based accounting only records transactions when cash is exchanged. Thus, regardless of GAAPs, record is made whenever cash is exchanged.//