Question

Sohni Dharti International is a renowned seed company and they want to expand their business.

They hire you as a financial expert and provide you following financial records for the years of 2019

and 2020. Company has Cash $53,000 in 2019 and $31,000 in 2020, Marketable securities $87,000

in 2019 and $0 in 2020, Account Receivable $346,000 in 2019 and $528,000 in 2020, Account

payable in 2019 is $13,000 and in 2020 is $27,000, Bank borrowing in 2019 is $10,000 and in 2020

is $35,000, common stock is $100,000 in both 2019 and 2020. Being a financial expert prepare cash

flow statement by using direct method and then give your opinion whether company has sufficient

funds to take advantage of investment opportunities or not?

Answer 1

The cash flows statement using the direct method is as follows

The cash as on the first date of 2019$=\$53,000$

The cash from the activities in 2019$=(\$510,000)$

Hence net cash deficit at the end of 2019$=\$53,000-\$510,000 =(\$457,000)$

The cash as on the first date of 2020$=\$31,000$

The cash from the activities in 2020$=(\$566,000)$

Hence net cash deficit at the end of 2019$=\$31,000-\$566,000 =(\$535,000)$

Hence the firm has no cash for the investment opportunity.