Chemco Coatings Case Study

Question 1: Using the given income statement and balance sheet data, I've generated a cash-based income statement for Chem-Co for 2005 below.

Chem-Co

Jennifer Haggerty 2005

CASH BASED INCOME STATEMENT $ 1,000,000 Cash Flow Impact

Net sales 861 Source Revenue

Change in accounts receivable (113) Use Asset Increase

Cash receipts from sales 748

Cost of goods sold (680) Use Expense

Change in inventory (39) Use Asset Increase

Change in accounts payable 17 Source Liability Increase

Cash purchases (702)

Cash margin 46

Total operating expenses (150) Use Expense

Depreciation & amortization 26 Source Noncash Expense

Change in prepaid expenses 3 Source Asset Decrease

Change in accruals 7 Source Liability Increase

Change in other current assets & liab. 0

Cash operating expenses (114)

Cash operating profit (68)

Interest on marketable securities 6 Source Revenue

Income on long term investments 0

All other expenses & income (net) 0

Cash before interest & taxes (62)

Interest expense - Bank notes 0

Interest expense - Term notes and LTD (18) Use Expense

Income taxes reported (5) Use Expense

Change in income tax payable 1 Source Liability Increase

Change in deferred income taxes 0

Cash flow from operations (CFO) (84)

Capital exp. and leasehold improvements (38) Use Asset Increase

Change in long-term investments 0

Change in intangible assets 1 Use Asset Increase

Change in other noncurrent assets 0

Cash Used for Investments (37)

Payment for last period's CM Term note 0

Payment for last period's CMLTD (9) Use Payment For Financing

Dividends paid (DIV) 0

Payments for financing (9)

Cash before external financing (130)

Change in short-term bank debt 117 Source Liability Increase

Change in term notes & EOP CM term notes (1) Use Liability Decrease

Change in LT debt + EOP CMLTD 0

Change in stock & surplus 0

Change in preferred stock 0

Change in treasury and other equities 0

Change in other noncurrent liabilities 0

External financing 116

Extraordinary exp. and cha. In acct. prin. 0

Current period accounting adjustment 10 Use Asset Decrease

Change in cash & mktbl securities (14)

Actual change in cash (24)

Question 2: Calculations are in the table below.

Days accounts receivable 2004: 56.21 days Days accounts receivable 2005: 91.14 days

Inventory turnover 2004: 40.69 days OR 8.97 times Inventory turnover 2005: 55.82 days OR 6.54 times

Days accounts payable 2004: 19.98 days Days accounts payable 2005: 25.38 days

Determine if the use/source of cash in working capital was a result of sales growth, credit policy, inventory policy, or trade credit policy. Did these turnover ratios improve or deteriorate? What was the resulting impact on cash flow?

Based on the numbers in the previous charts, it appears that the use of cash was a result of a mixture of several variables to include sales growth, credit policy (payables and receivables), and inventory policy. The company's sales did increase 30% from 2004 to 2005 which also brought additional uses of cash. We also saw many of their ratios deteriorate during this year, mostly, I assume, due to credit policy. They are allowing their receivables to be paid over a longer term in 2005 than in 2004; this leapt up from 56.21 days in 2004 to 91.14 days in 2005. It is not stated whether they chose to allow this extension or if there are issues with collections on receivables. Possibly the industry is deteriorating. (Additional knowledge of this industry in their geographic region during this time period would be necessary.) Additionally, they are turning over their inventory slower than in 2004 Ð'- every 56 days in 2005 vs. every 41 days in 2004. This could be because their inventory mix changed when they bought the pool manufacturer.

All of these factors are uses of cash and are directly impacting the availability of working capital which deteriorated in 2005. The resulting impact on cash flow was (24).

Question 3: Interpret the figures by