Question 3CRS-TP1: Consider the following balance sheets for the Philippe Corpo...
Consider the following balance sheets for the Philippe Corporation. Calculate the changes in the various accounts and, where applicable, identify the change as a source or use of cash. What were the major sources and uses of cash? Did the company become more or less liquid during the year? What happened to cash during the year?
| PHILIPPE CORPORATION Balance Sheets as of December 31, 2001 and 2002 ($ in millions) |
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| 2001 | 2002 | |
| Assets | ||
| Current assets | ||
| Cash | $210 | $215 |
| Accounts receivable | 355 | 310 |
| Inventory | \underline{507} | \underline{328} |
| Total | \underline{\underline{\$1,072}} | \underline{\underline{\$853}} |
| Fixed assets | ||
| Net plant and equipment | \underline{\$6,085} | \underline{\$6,527} |
| Total assets | \underline{\$7,157} | \underline{\$7,380} |
| Liabilities and Owners’ Equity | ||
| Current liabilities | ||
| Accounts payable | $207 | $298 |
| Notes payable | \underline{1,715} | \underline{1,427} |
| Total | \underline{\$1,922} | \underline{\$1,725} |
| Long-term debt | \underline{\underline{\$1,987}} | \underline{\underline{\$2,308}} |
| Owners’ equity | ||
| Common stock and paid-in surplus | $1,000 | $1,000 |
| Retained earnings | \underline{2,248} | \underline{2,347} |
| Total | \underline{\$3,248} | \underline{\$3,347} |
| Total liabilities and owners’ equity | \underline{\underline{\$7,157}} | \underline{\underline{\$7,380}} |
We’ve filled in the answers in the following table. Remember, increases in assets and decreases in liabilities indicate that we spent some cash. Decreases in assets and increases in liabilities are ways of getting cash.
Philippe used its cash primarily to purchase fixed assets and to pay off short-term debt. The major sources of cash to do this were additional long-term borrowing, reductions in current assets, and additions to retained earnings.
| PHILIPPE CORPORATION Balance Sheets as of December 31, 2001 and 2002 ($ in millions) |
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| 2001 | 2002 | Change | Source or Use of Cash |
|
| Assets | ||||
| Current assets | ||||
| Cash | $210 | $215 | +$ 5 | |
| Accounts receivable | 355 | 310 | – 45 | Source |
| Inventory | \underline{507} | \underline{328} | \underline{ – 179} | Source |
| Total | \underline{\underline{\$1,072}} | \underline{\underline{\$853}} | \underline{\underline{-\$219}} | |
| Fixed assets | ||||
| Net plant and equipment | \underline{\$6,085} | \underline{\$6,527} | \underline{+\$442} | Use |
| Total assets | \underline{\$7,157} | \underline{\$7,380} | \underline{+\$223} | |
| Liabilities and Owners’ Equity | ||||
| Current liabilities | ||||
| Accounts payable | $207 | $298 | +$ 91 | Source |
| Notes payable | \underline{1,715} | \underline{1,427} | \underline{-288} | Use |
| Total | \underline{\$1,922} | \underline{\$1,725} | \underline{-\$197} | |
| Long-term debt | \underline{ \underline{\$1,987}} | \underline{ \underline{\$2,308}} | \underline{ \underline{+\$321}} | Source |
| Owners’ equity | ||||
| Common stock and paid-in surplus | $1,000 | $1,000 | +$ 0 | – |
| Retained earnings | \underline{2,248} | \underline{2,347} | \underline{+ 99} | Source |
| Total | \underline{\$3,248} | \underline{\$3,347} | \underline{+\$ 99} | |
| Total liabilities and owners’ equity | \underline{\underline{\$7,157}} | \underline{\underline{\$7,380}} | \underline{\underline{+\$223}} | |
The current ratio went from $1,072/1,922 = .56 to $853/1,725 = .49, so the firm’s liquidity appears to have declined somewhat. Overall, however, the amount of cash on hand increased by $5.