Cash Flow Statement

Cash Flow Statement


You’ve just been hired onto ABC Company as the corporate controller. ABC Company is a manufacturing firm that specializes in making cedar roofing and siding shingles. The company currently has annual sales of around $1.2 million, a 25% increase from the previous year. The company has an aggressive growth target of reaching $3million annual sales within the next 3 years. The CEO has been trying to find additional products that can leverage the current ABC employee skillset as well as the manufacturing facilities.
As the controller of ABC Company, the CEO has come to you with a new opportunity that he’s been working on. The CEO would like to use the some of the shingle scrap materials to build cedar dollhouses. While this new product line would add additional raw materials and be more time-intensive to manufacture than the cedar shingles, this new product line will be able to leverage ABC’s existing manufacturing facilities as well as the current staff. Although this product line will require added expenses, it will provide additional revenue and gross profit to help reach the growth targets. The CEO is relying on you to help decide how this project can be afforded Provide details about the estimated product costs, what is needed to break even on the project, and what level of return this product is expected to provide.
In order to help out the CEO, you need to prepare a six- to eight-page report that will contain the following information (including exhibits, but excluding your references and title page). Refer to the accompanying Excel spreadsheet (available through your online course) for some specific cost and profit information to complete the calculations.
Final Paper Spreadsheet
I. An overall risk profile of the companybased on current economic and industry issues that it may be facing.
II. Current company cash flow

a. You need to complete a cash flow statement for the company using the direct method.
b. Once you’ve completed the cash flow statement, answer the following questions:

i. What does this statement of cash flow tell you about the sources and uses of the company?
ii. Is there anything ABC Company can do to improve the cash flow?
iii. Can this project be financed with current cash flow from the company? Why or why not?
iv. If the company needs additional financing beyond what ABC Company can provide internally (either now or sometime throughout the life of the project), how would you suggest the company obtain the additional financing, equity or corporate debt, and why?

III. Product cost: ABC Company believes that it has an additional 5,000 machine hours available in the current facility before it would need to expand. ABC Company uses machine hours to allocate the fixed factory overhead, and units sold to allocate the fixed sales expenses. ABC Company expects that it will take twice as long to produce the expansion product as it currently takes to produce its existing product.

a. What is the product cost for the expansion product?
b. By adding this new expansion product, it helps to absorb the fixed factory and sales expenses. How much cheaper does this expansion make the existing product?
c. Assuming ABC Company wants a 40% gross margin for the new product, what selling price should it set forthe expansion product?
d. Assuming the same sales mix of these two products, what are the contribution margins and break-even points by product?

IV. Potential investments to accelerate profit: ABC company has the option to purchase additional equipment that will cost about $42,000, and this new equipment will produce the following savings in factory overhead costs over the next five years:
Year 1, $15,000
Year 2, $13,000
Year 3, $10,000
Year 4, $10,000
Year 5, $6,000
ABC Company uses the net-present-value method to analyze investments and desires a minimum rate of return of 12% on the equipment.

a. What is the net present value of the proposed investment ignore income taxes and depreciation?
b. Assuming a 5-year straight-line depreciation, how will this impact the factory’s fixed costs for each of the 5 years (and the implied product costs)? What about cash flow?
c. Considering the cash flow impact of the equipment as well as the time-value of money, would you recommend that ABC Company purchases the equipment? Why or why not?


ABC Company’s current financial information (before/without expansion)
Dec. 31,19X2 Dec. 31,19X1

$ 5,000

$ 7,000

Accounts receivable (net)

$ 12,000

$ 18,000

Merchandise inventory

$ 35,000

$ 28,000

Property plant, & equipment

$ 40,000

$ 30,000

Less: Accumulated depreciation

$ (17,000)


Total assets

$ 75,000

$ 73,000

Accounts payable*

$ 25,000

$ 21,000

Income taxes payable

$ 4,000

$ 1,000

Common stock

$ 24,000

$ 24,000

Retained earnings

$ 22,000

$ 27,000

Total liabilities & stock, equity

$ 75,000

$ 73,000

The firm’s accrual-basis income statement revealed the following data:
Sales $120,000
Cost of goods sold $80,000
selling and administrative expenses $25,000
Depreciation expense $7,000
Income taxes $3,000
Dividends declared and paid during 19X2 $10,000
ABC purchased $10,000 of equipment for cash on August 14.
(There was no interest expense.)


ABC’s Product information

Current Product

Expansion Product (estimate)

Selling Price



Units produced and expected to be sold 80,000 5,000
Machine Hours 40,000 5,000
Direct Materials

$1.30 per unit

$5.60 per unit

Direct labor dollars needed per product

$2.80 per unit

$4.00 per unit

Variable Factory Overhead

$1.00 per Machine Hour

$1.00 per Machine Hour

Variable Selling Expense

$0.20 per unit

$0.20 per unit

Total Fixed Costs:
Fixed Factory Overhead $198,000
Fixed Selling expenses $191,250