Answered Essay: Salza Technology Corporation increased its sales from $375,000 in 2012 to $450,000 in 2013 as shown in the firm's i

creased to $60,000 8. [Statement of Cash Flows and Cash Burn or Build] Salza Technology Corporation increased its sales from $375,000 in 2012 to $450,000 in 2013 as shown in the firms income statements presented below. LeAnn Sands, chief executive officer and founder of the firm, expressed concern that the cash account and the firms marketable securities declined substantially between 2012 and 2013. Salzas complete bal- ance sheets are also shown. Ms. Sands is seeking your assistance in the preparation of a statement of cash flows for Salza Technology A. Prepare a statement of cash flows for 2013 for Salza Technology Corporation B. Provide a brief description of what happened in terms of cash flows (both inflows and outflows) for Salza between 2012 and 2013 SALZA TECHNOLOGY CORPORATION ANNUAL INCOME STATEMENTS (IN THOUSANDS) 2012 2013 Net sales Less: Cost of goods sold Gross profit Less: Operating expenses Less: Depreciation Less: Interest Income before taxes Less: Income taxes Net income Cash dividends $375 225 150 -40 -25 -4 75 20 $450 270 180 -46 -30 -4 100 -30 S 70 20 $ 17

Salza Technology Corporation increased its sales from $375,000 in 2012 to $450,000 in 2013 as shown in the firm’s income statements presented below. LeAnn Sands, chief executive officer and founder of the firm, expressed concern that the cash account and the firm’s marketable securities declined substantially between 2012 and 2013. Salza’s complete balance sheets are also shown. Ms. Sands is seeking your assistance in the preparation of a statement of cash flows for Salza Technology. A. Prepare a statement of cash flows for 2013 for Salza Technology Corporation. B. Provide a brief description of what happened in terms of cash flows (both inflows and outflows) for Salza between 2012 and 2013. C. Use your calculations from Part A for cash flows from operating and investing activities to indicate the extent to which Salza was building or burning cash in 2013. D. Convert the 2013 annual cash build or cash burn to a monthly rate. If cash flow activities relating to operations and investing for 2013 continue into 2014, indicate (1) how long it will be before Salza runs out of cash (if Salza is burning cash) or (2) the expected 2014 year-end cash account balance if Salza is building cash. Assume no changes in cash flows from financing activities in 2014 for calculation purposes.

Expert Answer

 

  1. Prepare a statement of cash flows for 2013 for Salza Technology Corporation.

Answer:

SALZA TECHNOLOGY CORPORATION
Statement of Cash Flows for 2013
Amount ($ in 000) Amount ($ in 000)
Cash from Operating Activities:
     Net Income 70
Add:
     Depreciation 30
     Increase in Accounts Payable 15
     Increase in Accrued Liabilities 13 58
Less:
     Increase in Inventories -53
     Increase in Accounts Receivables -30 -83
Net cash flow from Operating Activities 45
Cash from Investing Activities:
     Increase in gross fixed assets -90
     Net cash from investing activities -90
Cash from Financing Activities:
     Increase in Bank Loan 7
     Increase in common stock 35
     Cash dividends paid -20
     Net cash from Financing Activities 22
Total Net Cash Increase (Decrease) -23
Cash at beginning of period 39
Total net cash decrease -23
Cash at the end of period 16
  1. Provide a brief description of what happened in terms of cash flows (both inflows and outflows) for Salza between years 2012 and 2013.

Solution:

 

Net Cash Flow from Operating Activities was a Positive 45
Net Cash flow from Investing Activities was a negative -90
Net Cash flow from Financing Activities was a positive 22
The Result was a decline in cash of 23 from 39 to 16 -23
  1. Use your calculations from Part A for cash flows from operating and investing activities to indicate the extent to which Salza was building or burning cash in 2013.

Solution:

Net Cash Burn = Cash flow from Operating Activities + Investing Activities

Net Cash Burn = $45,000 + ($90,000)

Net Cash Burn = ($45,000)

  1. Convert the 2013 annual cash build or cash burn to a monthly rate. If cash flow activities relating to operations and investing for 2013 continue into 2014, indicate: (1) how long it will be before Salza runs out of cash (if Salza is burning cash), or (2) the expected 2014 year-end cash account balance if Salza is building cash. Assume no changes in cash flows from financing activities in 2014 for calculation purposes

Solution:

Monthly Burn Rate = Annual Burn / 12

Monthly Burn Rate = ($45,000) / 12

Monthly Burn = ($3,750) per month

 

Time to Out of Cash = Cash / Monthly Burn Rate

Time to Out of cash = $16,000 / $3,750

Time to Out of Cash = 4.3 months

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