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2019 Financial Performance Overview

The document contains financial statements for a company in 2019 and 2018, including a balance sheet, income statement, and cash flow statement. It shows that in 2019, the company's assets increased to over $3 million from $2 million in 2018. Sales and expenses also increased substantially from 2018 to 2019. The cash flow statement indicates the company had a net cash decrease of $12,000 in 2019 from operating activities but obtained $762,000 from financing activities, resulting in a $200,000 increase in cash.

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Lezi Woo
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Topics covered

  • Financial Statements,
  • EBIT,
  • Balance Sheet,
  • Profitability,
  • Operating Cash Flow,
  • Long-term Investment,
  • Financial Performance,
  • Net Working Capital,
  • Performance Measures,
  • Operating Capital
397 views4 pages

2019 Financial Performance Overview

The document contains financial statements for a company in 2019 and 2018, including a balance sheet, income statement, and cash flow statement. It shows that in 2019, the company's assets increased to over $3 million from $2 million in 2018. Sales and expenses also increased substantially from 2018 to 2019. The cash flow statement indicates the company had a net cash decrease of $12,000 in 2019 from operating activities but obtained $762,000 from financing activities, resulting in a $200,000 increase in cash.

Uploaded by

Lezi Woo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Topics covered

  • Financial Statements,
  • EBIT,
  • Balance Sheet,
  • Profitability,
  • Operating Cash Flow,
  • Long-term Investment,
  • Financial Performance,
  • Net Working Capital,
  • Performance Measures,
  • Operating Capital

ACTIVITY 1 FINANCIAL MANAGEMENT MBA 2

2019 2018
Cash 350,000 150,000
Accounts Receivable 840,000 580,000
Merchandise Inventory 660,000 420,000
Prepaid Expenses 50,000 100,000
Long term Investment 220,000 200,000
Property, Plant and Equipment 1,130,000 600,000
Accumulated Depreciation 110,000 50,000
Accounts Payable 530,000 440,000
Interest Payable 140,000 100,000
Accrued Expenses 140,000 130,000
Dividends Payable 70,000 0
Notes Payable - Long term 500,000 0
Share Capital 1,200,000 900,000
Retained Earnings (year-end) 560,000 430,000
Sales 6,400,000 4,000,000
Cost of Goods Sold 5,000,000 3,200,000
Operating Expenses 1,000,000 520,000
Interest Expense 60,000 0
Income Before Tax 340,000 280,000
Income Tax (30%) 102,000 84,000
Net Income 238,000 196,000

Comparative Balance Sheet


Change
2019 2018 increase/
(decrease)
Assets
Cash 350,000 150,000 200,000
Accounts Receivable 840,000 580,000 260,000
Merchandise Inventory 660,000 420,000 240,000
Prepaid Expenses 50,000 100,000 (50,000)
Long Term Investment 220,000 200,000 20,000
Property, Plant and Equipment 1,130,000 600,000 530,000
Accumulated Depreciation (110,000) (50,000) (60,000)
Total Assets 3,140,000 2,000,000 1,140,000
Liabilities and Equity
Liabilities:
Accounts Payable 530,000 440,000 90,000
Interest Payable 140,000 100,000 40,000
Accrued Expenses 140,000 130,000 10,000
Dividends Payable 70,000 0 70,000
Notes Payable - Long term 500,000 0 500,000
Total Liabilities 1,380,000 670,000 710,000
Equity:
Share Capital 1,200,000 900,000 300,000
Retained Earnings (year-end) 560,000 430,000 130,000
Total Equity 1,760,000 1,330,000 430,000
Total Liabilities and Equity 3,140,000 2,000,000 1,140,000

Income Statement
2019 2018
Sales 6,400,000 4,000,000
Cost of Goods Sold 5,000,000 3,200,000
Gross 1,400,000 800,000
Operating Expenses 1,000,000 520,000
Interest Expense 60,000 0
Total Expense 1,060,000 520,000
Gross – Total Expense 340,000 280,000
Income Before Tax 340,000 280,000
Income Tax (30%) 102,000 84,000
Net Income 238,000 196,000

Part 1. CASH FLOW STATEMENT FOR 2019, INDIRECT METHOD

CASH FLOW STATEMENT FOR 2019


CASH FLOW FROM OPERATING ACTIVITIES
Net Income Before Tax 340,000
Adjustments:
Depreciation 60,000
Interest Expense 60,000
Operating income before working capital change 460,000
(260,000
Increase in accounts receivable )
(240,000
Increase in MI )
Decrease in prepayments 50,000
Increase in accounts payable 90,000
Increase in A/E 10,000
110,000
Interest Paid (20,000)
(102,000
Income Taxes Paid )
Net Cash used in operating activities (12,000)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of Additional Investment (20,000)
(530,000
Purchase of Additional PPE )
(550,000
Net Cash used in investing activities )
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from notes payable 500,000
Dividends paid (38,000)
Proceeds from issuance of share capital 300,000
Net cash from financing activities 762,000
Net Increase in cash during the year 200,000
Cash, Beginning 150,000
Cash, Ending 350,000

Part 2. PERFORMANCE MEASURES FINANCIAL STATEMENTS


1. WORKING CAPITAL (WC)
WC = Current Assets

CURRENTS ASSETS:
Cash 350,000
Accounts Receivables 840,000
Merchandise Inventory 660,000
Prepaid Expenses 50,000
Total Current Assets 1,900,000
2. NET WORKING CAPITAL (NWC)
NWC = Current Assets – Current Liabilities

CURRENTS ASSETS:
Cash 350,000
Accounts Receivables 840,000
Merchandise Inventory 660,000
Prepaid Expenses 50,000 1,900,000
CURRENT LIABILITIES:
Accounts Payable 530,000
Interest Payable 140,000
Accrued Expenses 140,000
Dividends Payable 70,000 880,000
NET WORKING CAPITAL 1,020,000

3. NET OPERATING WORKING CAPITAL (NOWC)


NOWC = Current Assets - Non-Interest-Bearing Current Liabilities

CURRENTS ASSETS:
Cash 350,000
Accounts Receivables 840,000
Merchandise Inventory 660,000
Prepaid Expenses 50,000 1,900,000
NON-INTEREST-BEARING CURRENT LIABILITIES:
Accounts Payable 530,000
Accrued Expenses 140,000 670,000
NET OPERTATING WORKING CAPITAL 1,230,000

4. OPERATING CAPITAL (OC)


OC = NOWC + Net Fixed Assets

CURRENTS ASSETS:
Cash 350,000
Accounts Receivables 840,000
Merchandise Inventory 660,000
Prepaid Expenses 50,000 1,900,000
NON-INTEREST-BEARING CURRENT LIABILITIES:
Accounts Payable 530,000
Accrued Expenses 140,000 670,000
NET OPERTATING WORKING CAPITAL 1,230,000
FIXED ASSETS:
Long-term Investment 220,000
Property, Plant and Equipment 1,130,000 1,350,000
OPERATING CAPITAL 2,580,000

5. NET OPERATING PROFIT AFTER TAX (NOPAT)


NOPAT = EBIT (1 - Tax Rate)
= 340,000 (1 - 30%)
= 340,000(0.7)
= 238,000

6. NET CASH FLOW (NCF)


NCF = Net Income + Depreciation & Amortization
= 238,000 + 110,000
= 348,000

7. OPERATING CASH FLOW (OCF)


OCF = NOPAT + Depreciation & Amortization
= 238,000 + 110,000
= 348,000

8. FREE CASH FLOW (FCF)


FCF = OCF - (Capital Expenditure + NOWC)

OPERTATING CASH FLOW 348,000


CAPITAL EXPENDITURE
Long-term Investment 220,000
Property, Plant and Equipment 1,130,000 1,350,000
NET WORKING CAPITAL
CURRENTS ASSETS:
Cash 350,000
Accounts Receivables 840,000
Merchandise Inventory 660,000
Prepaid Expenses 50,000 1,900,000
NON-INTEREST-BEARING CURRENT
LIABILITIES:
Accounts Payable 530,000
Accrued Expenses 140,000 670,000 1,230,000 2,580,000
FREE CASH FLOW (2,232,000)

--END--

Common questions

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The company's net working capital increased to 1,020,000 in 2019, driven by growth in current assets over current liabilities . Net operating working capital (NOWC) rose to 1,230,000, showing an ability to fund operations from its immediate resources without interest-bearing liabilities . This increase in working capital and NOWC suggests improved short-term financial health and operational efficiency, though high accounts receivable growth signals potential inefficiencies in collections .

In 2019, the company had a negative net cash flow from operating activities of (12,000) due to increased accounts receivable, inventory, and interest paid, implying operational efficiency issues . Cash used in investing activities was (550,000), stemming from significant investments in property, plant, and equipment, indicating a strategic expansion but potentially stressing cash reserves . Financing activities generated 762,000 through notes payable and share capital issuance, indicating external reliance for funding operations and growth . This mixed cash flow suggests growth but with operational and liquidity challenges.

The company's total assets increased from 2,000,000 in 2018 to 3,140,000 in 2019, reflecting a growth of 1,140,000 primarily due to increases in accounts receivable, merchandise inventory, and property, plant, and equipment . Liabilities grew by 710,000, driven by new long-term notes payable and increased accounts and interest payable. Equity grew by 430,000 due to increases in share capital and retained earnings .

The increase in property, plant, and equipment by 530,000 in 2019 provides future growth potential and operational capacity expansion, allowing for scale efficiencies and revenue growth . However, risks include increased financial burden and liquidity constraints, as reflected by the negative free cash flow, which could affect the company's ability to meet short-term obligations . There is also the risk of underutilizing the new capacities if market demand doesn't match expectations.

The increase in share capital by 300,000 enhanced the company's equity, raising total equity to 1,760,000 in 2019 . This improved equity position might have been aimed at strengthening the balance sheet, reducing reliance on debt, and supporting growth initiatives. However, it also implies potential dilution for existing shareholders and reflects a strategic choice to leverage equity financing over debt in response to liquidity needs and capital expenditures .

In 2019, net income was 238,000, while free cash flow was significantly negative at (2,232,000). Despite positive net income, the negative free cash flow indicates substantial cash outflow due to high capital expenditures on property, plant and equipment, and working capital needs exceeding operational gains . This discrepancy suggests that while the company was profitable on the income statement, it faced cash management and liquidity challenges, potentially requiring improved cash flow management.

To improve cash flow from operating activities, the company should enhance accounts receivable collections, possibly tightening credit terms or offering discounts for early payments to accelerate cash inflows . Inventory management could be optimized to avoid overstocking and reduce holding costs. A review of operating expenses for efficiency improvements and cost-cutting opportunities can further aid. Additionally, renegotiating payment terms with suppliers might extend payables without affecting procurement continuity, preserving cash on hand . Developing forecasting models to better predict cash needs and aligning capital expenditures with cash generation capacity can sustain positive cash flow.

Sales increased to 6,400,000 from 4,000,000 in 2019, complemented by an increase in cost of goods sold to 5,000,000 and operating expenses to 1,000,000 . Despite these cost increases, the gross profit margin appears healthy, indicating effective pricing strategies or cost controls in manufacturing. However, operating expenses doubled, which could indicate inefficiencies or increased investment in operations to support expanded activities. Overall, profitability before tax improved, with income before tax up to 340,000 from 280,000, showcasing effective sales growth .

The company’s strategy to finance operations via a 500,000 increase in long-term debt and a 300,000 equity issuance was likely driven by the need to cover substantial capital expenditures and operational cash shortfalls . While this approach diversifies funding sources and supports growth, it increases financial leverage, which can lead to higher future interest expenses and reliance on external funding. Equity issuance mitigates some debt-related risks but could dilute existing ownership. This capital strategy supports immediate needs but requires careful long-term financial planning .

Accounts receivable increased by 260,000 from 2018 to 2019, reaching 840,000, suggesting potential leniency in credit policies or challenges in collections . This increase may highlight inefficiencies in accounts receivable management or a strategic choice to boost sales via extended credit terms. However, it presents a potential liquidity risk by tying up cash, which could hinder the company's ability to cover short-term costs without improved collection efforts .

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