Question: For the Chemlite case I will need a spreadsheet which is a proforma statement of cash flows using the 1992 data.

For Lisa's watebed case I will need a spreadsheet that has a income statement, balance sheet and retained earnings statement using the data in the case.

Chemalite, Inc. (B)

Cash Flow Analysis

Bennett Alexander, a chemical engineer, founded Chemalite, Inc. in late 1990. The company was set up to manufacture and sell his latest patented invention, the Chemalite. The first year of operations was successful, allowing Chemalite's directors to declare a $10,000 dividend at the end of 1991. Exhibit 1 presents the income statement and balance sheet for the year ended December 31, 1991.

During the meeting with the company shareholders, held in January 1992, Alexander was congratulated for the company's performance during its first year of operations. After much discussion, the shareholders approved moving the production facilities to a larger location to support expanding sales. They hoped that Chemalite could build market share before any competing product reached the market. They also approved expanding the product line to include new colors.

The shareholder meeting ended with a decision to meet during late March to review the performance of the company and study the projected financial statements for 1992.

To prepare for the March meeting, Alexander asked his accountant to provide him with the expected financial statements for the year ending December 31, 1992. Exhibit 1 reproduces the report that he received from the accountant. In addition to this report, the accountant provided the following notes:

1. According to our marketing people, sales during the year are expected to increase 150% as we continue to build market share. Half of this growth is expected to come from new wholesalers. Our limited experience with this channel indicates that even if they are supposed to pay in 30 days, the average is 40 days.

2. We will need to maintain a stock of finished goods to give the required service to wholesalers.

3. The average stock of raw materials is assumed to be $75,450.

4. The land and building for the new production facility will cost $850,000, of which $250,000 corresponds to the land. The facility will be operating at the beginning of July, its expected life is 10 years, and it will be depreciated using the straight-line method for accounting purposes and an accelerated method for tax purposes.

5. The seller of the facility will pass title on June 30 and receive half of the purchase price in cash and the other half in three equal annual installments beginning June 30, 1994.

6. As agreed by the board, we will also need to purchase new, higher capacity machines. My understanding is that we will replace the machines that we purchased in June last year (our vendor claims their resale value is now very high). The selling price of the old machines is estimated to be $215,500. The new machines will cost $520,000. These cash transactions will take place in late June and the expected life of the new machines is 10 years.

7. Starting in July we will also buy insurance for the building, inventories, and business disruption. The cost of the insurance is $97,500 cash and it will be in force from July 92 to December 93.

8. In January 1992 we paid the 1991 cash dividend of $0.02 per share.

9. According to Januarys shareholders' meeting, 10% of 1992 net income will be distributed as dividends to existing shareholders.

10. As you told me, one of our shareholders needs to sell his shares due to personal problems. I have assumed that the company will repurchase his 20,000 shares at $130 per share.

11. Finally, I have assumed that the rest of our financing needs will be covered by long-term and short-term debt. We are now negotiating with the bank for a long¬term, secured loan of $510,000 effective June 30 at 10% paid annually."

Alexander looked at the report from the accountant and the related assumptions. The net income was very attractive-increasing by over 400%. Undoubtedly the new production facility and the bigger machines were a good investment. But the amount of short term debt that he saw in the balance sheet was a matter of concern. He wondered whether this amount of financing was really needed. He knew that the shareholders would also have questions.

The first step was to understand where the cash was going and where it was coming from. The second step was to understand why such a good earnings forecast required so much debt.

Required

1. Prepare a proforma statement of cash flows for 1992 using the indirect method.

3. What are the main sources and uses of cash revealed by your analysis?

4. What would you recommend to Bennett Alexander?

LISA'S WATERBED EMPORIUM INC.

Lisa had a formidable task ahead of her; she wanted to prepare an income statement, statement of retained earnings and a balance sheet for the year ended or as of September 30, 2012, whichever was appropriate. In order to prepare these statements, Lisa had assembled information from the accountant, the bank and various departments within the company. She had only 50 minutes to complete the work before her meeting and so she began in a fury.

Lisa noted with pride that her company had achieved sales of $487,000, of which only $103,000 had not been collected. To provide this sales level, $330,000 worth of goods had been purchased throughout the year, of which only $68,000 had not been paid for yet.

At the beginning of the year, Lisa had noted that there was $82,000 worth of goods in the storeroom and she wondered how much money was invested in the inventory currently on hand.

Lisa thought back to her initial decision to purchase the company and remembered that she had paid $21,000 over the book value of the company for a number of reasons. The land was listed at $60,000 and the building and equipment were listed at a cost of $80K. She also remembered incurring start-up costs of $4,000.

While leafing through the accountant's notes, Lisa surmised that, as of September 30, 2011, accumulated depreciation on the building and equipment was $10,000. In addition, as of September 30, 2012, marketable securities totalled $60,000 and outstanding liabilities included notes payable of $67,000 and the current portion of the long-term debt of $10,000. Finally, for the fiscal year ending September 30, 2012, general and administrative expenses were $130,000 and the depreciation expense was $5,000.

While trying to sort through all of the information, Lisa noted from the bank statements that the long-term portion of the mortgage loan was $113,000 and the debentures (5 per cent due 2014) were at $34,000.

Lisa knew she couldn't forget about taxes; the company had incurred an income tax expense of $8,000 of which $3.000 was outstanding.

In addition, Lisa wanted to satisfy her shareholders and, therefore, she paid $3,000 in dividends to the holders of the $30,000 in common stock.

Finally, Lisa had made some headway; for the year ending September 30, 2012, net income after tax was $23,000, net operating profit was $31,000 and gross profit was $166,000; as of September 30, 2012, retained earnings were $81,000 and total liabilities and shareholder's equity were $406,000.

One last question still plaguing Lisa was how much cash the company had as of September 30, 2012.

In addition, Lisa wanted to satisfy her shareholders and, therefore, she paid $3,000 in dividends to the holders of the $30,000 in common stock.

Finally, Lisa had made some headway; for the year ending September 30, 2012, net income after tax was $23,000, net operating profit was $31,000 and gross profit was $166,000; as of September 30, 2012, retained earnings were $81,000 and total liabilities and shareholder's equity were $406,000.

One last question still plaguing Lisa was how much cash the company had as of September 30, 2012.