Advanced Financial Statement Cash Flow Problems

Question :

Explain Cash Flow Problems and Cases in finance

Answer :

This shows an increase in cash obtained from other activities as well and analysing the statements shows that depreciation and stock-based expenses have been more or less consistent for the 3 years. The equity income or losses or cash from dividend has been highest in the 3rd year but the changes in cash position from net-income comes because of addition of depreciation in cash flows. In net-income calculation, depreciation is deducted which is added back in cash flow which increases the cash position in the company like Coca-Cola (Miao, Teoh & Zhu, 2016). 

The difference in cash flow from operating activities, investing activities and financing activities can be observed as follows. The cash position of Coca-Cola from operating activities has been sufficient and in thousands of dollars which is to be expected from a mature company like Coca-Cola. A mature company like Coca-Cola has an established business and distribution channels which help in sale products and the company doesn't need to spend a lot to sell more. This helps the company lower costs of operations and earn higher sales and higher profits. Furthermore, the cash position of the company is considered rich as the money is received fast from customers and no receivables are created. In contrast, payables can be created as creditors have trust in the credit position of the company and this results in change in policies where companies can keep their payment due. This is the reason that mature companies like Coca-Cola have higher cash flows from operating activities (Salehi,  BehrouziYekta & Ranjbar, 2020).

For the comparison of cash flows from various activities, we observe the cash flows from investing activity and observe that the company has a negative cash position in investing activity. This is because the company has spent cash for investing in machineries and purchase of property, plant and equipment. This results in negative cash position in investment activity which is perfectly normal for companies like Coca-Cola who have been in the market for many years and have created a reputation for them (Knežević, Mitrović, & Ilić, 2016). Also, Coca-Cola generates enough cash flow from operating activity which is used for payments made in investing activity. For cash flow position in financing activity, it can be observed that for 2 years the cash position has been negative for Coca-Cola due to payment of debt, purchase of shares and payment of dividend. This is because the company has enough cash generated from operations that help the company pay all of its debt and help pay-off the dividends to shareholders which not only increase their goodwill in the market but also increase their share price. 

The main reason for the changes is first addition of depreciation to cash flow statement which increases the cash position. The other change in this value can be attributed to stock-based compensation which lessens the negative impact of cash position in operating activities. The cash flow from investing activities is also negative but the impact is less than the cash position from operating activities. The net loss is of a large amount than the negative cash position of financing activity. This is because of purchase of marketable securities  and property, equipment  by the company. This activity by the company shows that it is at the starting age or early age of life cycle and this is because the operating activities from the company are negative. This shows that the company has not reached the stage where it becomes mature to receive cash from customers immediately and receive extra credit period of creditors. Furthermore, since investing activities of the company are negative it shows that the company is in its early stages as a company in a declining stage would have positive cash flow from investing activity due to proceeds obtained from sale of property, equipment and plants. The company in its early stages like Tesla continues its investment and thus, shows a negative cash position (Avhad & Yadav, 2020). 

Observing the cash position of the company in financing activities, it is seen that cash position is positive in financing activities. The cash position from financing activity is very good and major cash is raised from financing activities only. This is further indication of the company being in its early stages as the company is obtaining funds from the market by issuing shares, obtaining loans, etc. and this shows that the company is looking for growth to come in next few years. Furthermore, the company is obtaining cash for its various activities from financing activities such as loans, share issue, etc.

Also, it is important to note that for maintain its operations and paying its creditors, the company needs funds, and the company obtains these from financing activities like issue of shares and proceeds from long-term debt and liabilities.

Thus, Tesla Motors was still in its early stages of development in 2010 to 2012 and was looking for growth, development and expansion in next few years by growing its operations, investing in newer areas and purchase of plants and property to expand further. This was the reason that the company was raising money from the market in large amounts so that it could use the cash generated in its operating activities and investing activities. 

The maximum growth in revenue is booked by the Sun Microsystems amounting to be 28% and the minimum by Biogen amounting to be -4%. The maximum amount, cash from form financing activities is generated by Home depot amounting to be 156%. Further, Pacific gas and Electric is incurring deficit of -60% (Stice et al, 2019).

The net income is the amount the remains in hand with the company or organisation after settling all the expenses from its revenues. The expenses include the amount remain unpaid or prepaid expenses (Knežević, Mitrović & Ilić, 2016). However, in case of net cash the income or revenues are per income statement are not include but the actual realisation are considered for the cash flow statement.

References:

Avhad, S. M., & Yadav, R. R. (2020). Cash Flow Statement.

Knežević, S., Mitrović, A., & Ilić, Z. (2016). Different perspectives on the cash flow statement. Hotel and Tourism Management, 4(2), 48-54.

Knežević, S., Mitrović, A., & Ilić, Z. (2016). Different perspectives on the cash flow statement. Hotel and Tourism Management, 4(2), 48-54.

Miao, B., Teoh, S. H., & Zhu, Z. (2016). Limited attention, statement of cash flow disclosure, and the valuation of accruals. Review of Accounting Studies, 21(2), 473-515.

Salehi, M., BehrouziYekta, M., & Ranjbar, H. R. (2020). The impact of changes in cash flow statement items on audit fees: evidence from Iran. Journal of Financial Reporting and Accounting.

Stice, D., Stice, E., & Stice, J. (2017). Cash Flow Problems Can Kill Profitable Companies. Available at SSRN 3057698.

Stice, J. D., Stice, E. K., Cottrell, D. M., & Stice, D. (2019). Teaching operating cash flow: One matrix for analysis–two methods for presentation. In Advances in Accounting Education: Teaching and Curriculum Innovations. Emerald Publishing Limited.