Larissa has also provided the following information. During the year, the company raised
$40 million in new long-term debt and retired $22.8 million in long-term debt. The company also
sold $30 million in new stock and repurchased $36 million. The company purchased $60 million in
fi xed assets, and sold $6,786,000 in fi xed assets.
Larissa has asked Dan to prepare the fi nancial statement of cash fl ows and the accounting statement
of cash fl ows. She has also asked you to answer the following questions:
1. How would you describe East Coast Yachts’ cash fl ows?
2. Which cash fl ows statement more accurately describes the cash fl ows at the company?
3. In light of your previous answers, comment on Larissa’s expansion plans.
To answer these questions, we need to calculate the cash flows using the information provided.
1. To describe East Coast Yachts' cash flows, we need to look at the sources and uses of cash during the year.
Sources of cash:
- New long-term debt raised: $40 million
- Sale of new stock: $30 million
Uses of cash:
- Retirement of long-term debt: $22.8 million
- Repurchase of stock: $36 million
- Purchase of fixed assets: $60 million
- Sale of fixed assets: $6,786,000
To calculate the cash flows, we can subtract the uses of cash from the sources of cash:
Total sources of cash = New long-term debt raised + Sale of new stock
Total sources of cash = $40 million + $30 million = $70 million
Total uses of cash = Retirement of long-term debt + Repurchase of stock + Purchase of fixed assets - Sale of fixed assets
Total uses of cash = $22.8 million + $36 million + $60 million - $6,786,000 = $111.014 million
Cash flows = Total sources of cash - Total uses of cash
Cash flows = $70 million - $111.014 million = -$41.014 million
Based on the above calculation, East Coast Yachts' cash flows were negative, indicating a net outflow of cash during the year.
2. Now let's analyze which cash flows statement more accurately describes the cash flows at the company.
There are two types of cash flows statements: the financial statement of cash flows (indirect method) and the accounting statement of cash flows (direct method).
The financial statement of cash flows starts with net income and adjusts non-cash items to determine the cash flows from operating activities. It then separately presents cash flows from investing and financing activities.
The accounting statement of cash flows directly presents the cash inflows and outflows from the operating, investing, and financing activities without adjusting for non-cash items.
Since the information provided does not include net income or non-cash items, we cannot accurately determine which cash flows statement is more appropriate. However, given the provided information, it is likely that the financial statement of cash flows (indirect method) would be more accurate as it adjusts for non-cash items.
3. Based on the negative cash flows and the analysis of the cash flows statements, we can comment on Larissa's expansion plans.
Larissa's expansion plans should be carefully evaluated considering the negative cash flows. Negative cash flows indicate that the company is using more cash than it is generating, which can pose financial challenges.
Larissa should assess the reasons behind the negative cash flows and evaluate if it is a temporary situation or a long-term issue. It is important to determine if the negative cash flows are due to heavy investments in fixed assets, paying off debts, or other factors.
If the negative cash flows are due to temporary reasons such as one-time investments or expansion costs, and the company has a solid plan to generate positive cash flows in the future, then the expansion plans may still be feasible.
However, if the negative cash flows persist or are caused by ongoing operational issues, it may be necessary to reassess the expansion plans and consider alternative strategies to improve the company's cash flow situation before proceeding with further expansion.