Question 3.S-TP.1: Sources and Uses of Cash Consider the following balance shee...
Sources and Uses of Cash 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 2017 and 2018 Balance Sheets ($ in millions) |
||
| 2017 | 2018 | |
| Assets | ||
| Current assets | ||
| Cash | $210 | $215 |
| Accounts receivable | 355 | 310 |
| Inventory | \underline{507} | \underline{328} |
| Total | \underline{\$1,072} | \underline{\$\text{ }853} |
| Fixed assets | ||
| Net plant and equipment | \underline{\$6,085} | \underline{\$6,527} |
| Total assets | \underline{\underline{\$7,157}} | \underline{\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{\$1,987} | \underline{\$2,308} |
| Owners’ equity | ||
| Common stock and paid-in surplus | $1,000 | $1,000 |
| Retained earnings | \underline{2,248} | \underline{2,347} |
| Total | \underline{\$3,248} | \underline{\$3,347} |
| Total liabilities and owners’ equity | \underline{\underline{\$7,157}} | \underline{\underline{\$7,380}} |
We’ve filled in the answers in the following table. Remember, increases in assets and decreases in liabilities indicate that we spent some cash. Decreases in assets and increases in liabilities are ways of getting cash.
Philippe used its cash primarily to purchase fixed assets and to pay off short-term debt. The major sources of cash to do this were additional long-term borrowing, reductions in current assets, and additions to retained earnings.
| PHILIPPE CORPORATION 2017 and 2018 Balance Sheets ($ in millions) |
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| 2017 | 2018 | 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{\$\text{ }853}} | \underline{\underline{-\$219}} | |
| Fixed assets | ||||
| Net plant and equipment | \underline{\$6,085} | \underline{\$6,527} | \underline{+\$442} | Use |
| Total assets | \underline{\underline{\$7,157}} | \underline{\underline{\$7,380}} | \underline{\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{+\text{ }99} | Source |
| Total | \underline{\$3,248} | \underline{\$3,347} | \underline{+\$\text{ }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.