ABC Corp. Statement of Cash Flows for 2010

Previously, we introduced readers to the third and final of the three major financial statements, the statement of cash flows, and produced the above-referenced example for our fictitious ABC Corporation.  Now it is time to do some financial analysis to see what the statement of cash flows has to tell us about the all-important cash position of a business.

At the conclusion of our previous post we mentioned that one of the entries on the statement of cash flows may very well be the most important figure on any of the financial statements.  So without further ado, let’s reveal what that figure is and why it is so important.  The object of our scrutiny is: net cash provided by operating activities. 

While you might thank that net income (i.e. profits) would be more important as it is the famous “bottom line” number from the income statement—and a favorite of the press when discussing a company’s financial results—savvy investors­, and business owners, prefer to focus on net cash provided by operating activities.

Net income can be subject to distortions—either intentional or unintentional—through tactics like not properly recognizing bad loans or misrepresenting the value of assets.  Because it is much harder to misstate profits and working capital, it always pays to look at net cash provided by operating activities, which reflects the effects of changes in working capital on a firm’s net income.  There are many examples of companies that have reported positive net income even when they are on the brink of declaring bankruptcy; in almost all of these cases though, net cash from operating activities began to deteriorate much earlier, providing an early clue that the firm was in trouble.

In the case of ABC Corp. we can see that while it had a positive net income of $23,000, its operating activities provided a negative $2,000 of cash flow.  This should cause us some concern as we continue to work our through the rest of the statement.

At the bottom of the next section, we see that ABC’s investing activities also resulted in a negative cash flow, in this case the figure is $6,500.  And in the last section we finally see some positive cash flow, to the tune of $3,500, as a result of ABC’s financing activities. The end result of all of this is that ABC saw its cash balance decline by $5,000 during the course of the year.

So what are we to make of all of this?  ABC’s operating activities drained it of $2,500 in cash yet it spent $8,500 on new fixed assets (a long-term investment), and it covered part of these costs by increasing its debt load (the $3,500 in additional notes payable).

The situation at ABC is clearly not sustainable and this is reflected in the fact that its cash balance at the end of year declined by 42% ($5,000/$12,000).  If ABC keeps on this same path for too much longer, it will eventually run out of cash.  In order to remedy the situation, ABC needs to take a hard look at refining its core operating activities, in addition to determining whether it has the right mix of assets to support its business, and whether or not its debt load is sustainable.  And of course, if you start to see your company’s cash position weakening, it is time to think about all of these things before the situation gets too dire.

So that concludes our series on the major financial statements that most firms produce, and that most lenders and investors want to see.  We once again remind readers that this series is intended as an introduction to financial statements and a beginning look at their analysis.  We hope that you are now better armed to analyze and make decisions about your firms’ financial matters, and encourage you to read further on these topics in a financial management textbook.

As we can note from the above sample of our fictitious ABC Corporation, the statement of cash flows is broken down into three categories—operating activities, investing activities, and financing activities—plus a summary section at the bottom.  If you are now familiar with the balance sheet and income statement from our previous posts, you should recognize most of the line items here because what the statement of cash flows does is pull information from those two statements in order to analyze their effects on ABC’s cash position.  As we go through the entries below, you may want to refer back to  ABC’s balance sheet and income statement to see where the numbers are coming from.

Net Income – Is the “bottom line” figure from the income statement.

Increases in Accounts Receivable, Inventories, Accounts Payable, and Accrued Payroll – These are all calculated by taking the difference between these figures on two successive balance sheets (e.g. 2010 and 2009 year-end).  For simplicity’s sake we only provided one year’s balance sheet for ABC Corp., but once your business has produced two or more balance sheets you would simply use the two most recent ones in order to make these calculations.  One important thing to note here is that an increase in a current asset decreases cash while an increase in a current liability increases cash.  For example, if your inventory (a current asset) increased, your cash would have to decrease by a like amount to pay for that inventory.

Cash Used to Acquire Fixed Assets – Calculated by taking the difference between the “Fixed Assets” entries on the two most recent balance sheets.

Sale of Short-Term Investments – Reflects short-term investments that have been converted to cash.

Increase in Notes Payable – Indicates the amount of additional short-term debt ABC has taken on.

Net Change in Cash – Equals the sum of the net cash provided by operating, investing, and financing activities.

Cash at Beginning of Year – Equals the Cash figure at the top of the most recent balance sheet.

Cash at End of Year – Cash at beginning of year minus the net change in cash.

Next, we will teach you how to analyze the statement of cash flows and show you why one item on it just might be the single most important figure to look at when analyzing any company.

A non-profit company does not pay a franchise tax fee, but is required to file and pay the $50 annual report fee.

For stock companies, there are two methods that the State of Delaware uses to calculate the amount of franchise tax fees due.  The first method is the “Authorized Shares Method” and the second method is the “Assumed Par Value Capital Method”.

Under the Authorized Shares Method, the minimum amount of franchise tax due is $75.  Under the Assumed Par Value Capital Method, the minimum amount of franchise tax due is $350.  With either method, the maximum amount due is $180,000.  In addition, the $50 annual report filing fee is added to the franchise tax amount due.

You may wonder how the franchise tax bill amount due is determined.  The State of Delaware will always generate the franchise tax notice under the Authorized Shares Method.  Therefore, the total number of authorized shares your company has is used to calculate the franchise tax bill.  You have the option to file the annual franchise tax report under either method.  The company will pay the franchise tax amount that is the lesser of the two methods.

The State of Delaware description of each method and calculation examples are shown here:

Authorized Shares Method:

• 5,000 shares or less (minimum tax) $75.00
• 5,001 – 10,000 shares – $150.00
• each additional 10,000 shares or portion thereof add $75.00
• maximum annual tax is $180,000.00

For Example

A corporation with 10,005 authorized shares pays $225.00 ($150.00 plus $75.00)
A corporation with 100,000 authorized shares pays $825.00 ($150.00 plus $675.00[$75.00 x 9])

Assumed Par Value Capital Method:

To use this method, you must declare figures for all issued shares (including treasury shares) and your total gross assets in the spaces provided in your Annual Franchise Tax Report.  This is a public record document and may be obtained by anyone from the State of Delaware. Total Gross Assets are those “total assets” reported on the U.S. IRS Tax Form 1120, Schedule L (Federal Tax Return) relative to the company’s fiscal year ending the calendar year of the report.  The tax rate under this method is $350.00 per million or portion of a million.  If the assumed par value capital is less than $1,000,000, the tax is calculated by dividing the assumed par value capital by $1,000,000 then multiplying that result by $350.00.  

The example cited below is for a corporation having 1,000,000 shares of stock with a par value of $1.00 and 250,000 shares of stock with a par value of $5.00, gross assets of $1,000,000 and issued shares totaling 485,000.

1. Divide your total gross assets by your total issuedshares carrying to 6 decimal places.  The result is your “assumed par”.Example: $1,000,000 assets, 485,000 issued shares = $2.061856 assumed par.
2. Multiply the assumed par by the number of authorizedshares having a par value of less than the assumed par.Example: $2.061856 assumed par s 1,000,000 shares = $2,061,856.
3. Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value.Example: 250,000 shares with $5.00 par value = $1,250,000
4. Add the results of #2 and #3 above.  The result is your assumed par value capital.Example:  $2,061,856 plus $1,250,000 = $3,311 956 assumed par value capital.
5. Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiply by $350.00.Example: 4 x $350.00 = $1,400.00
6. The minimum tax for the Assumed Par Value Capital Method of calculation is $350.00.

If you are in need of help in determining the amount of franchise tax fees due for your company, just let us know.  We offer a franchise tax filing fee service and will gladly review your account and calculate the franchise tax fees due to the lowest legal amount.

Our Franchise Tax Department can be reached via email at franchisetax@delawareinc.com.  Or we can be contacted via telephone at 1-800-345-2677 or 1-302-645-2677, extension 6901.

If you are considering an office remodel then you’ll want to focus on maximizing the utility of the following features in order to get the best return on your investment.

Walls

Once you’ve owned your own business for some time—and been through the ups and downs of a few economic cycles—you come to realize that it’s not just the amount of space you need that can change, but also the way in which that space is configured.  Moveable walls are a great solution that can save you a substantial amount of money compared to fixed walls, while also offering the flexibility to change the layout of specific spaces (e.g. from a set of private offices to a conference room) virtually overnight.  Moveable walls come in a variety of durable materials and finishes including some that incorporate glass, allowing natural light to flow further into a large work setting.

Light

Increasing the amount of natural light that enters your workspace has myriad benefits.  In addition to being aesthetically preferable to artificial alternatives, natural light will reduce your energy bills and has been shown to boost worker productivity.  Besides designing your office to take full advantage of available natural light, installing a lighting system that works in conjunction with natural light by dimming or shutting off entirely when there is ample natural light can save you additional money on utility bills.

Floors

With an office remodel it’s not so much the floors as what’s underneath them that can add the most value. By taking advantage of raised-access technology it is possible to house the majority of your power, data, and communications cables underneath the floors and out of sight.  On top of the obvious aesthetic benefit, the under-floor setup provides outstanding flexibility for the inevitable future configuration changes and furniture reshuffling.  If you are doing a major remodel, or starting fresh in a new space, it is also worth looking into an under-floor HVAC (heating, ventilation, and air conditioning) system, which can offer increased energy efficiency, improved air quality, and a safer alternative to traditional wall-mounted systems.

Furniture

Outfitting your remodeled space with new furniture should be the last step in the remodel.  Hopefully you’ll have taken into account the advice to create a flexible workspace when choosing walls and floors, so you’ll want to select furniture that is flexible as well. There are lots of choices in both modular office furniture and adaptable workstations that can help keep you from having to purchase new items every time your needs change.

By carefully planning your remodel with an eye toward increased efficiency as well as future organizational change, you should be able to recoup some of the cost of the remodel and wind up with an office that allows your firm to adapt to whatever changes lie ahead.

It is easy to be fooled, because most of these bogus emails carry the famous BBB torch logo, and come with a subject line such as “Complaint from your customers.”  Below is an example of one of the phishing emails Harvard Business Services recently received:

From: BBB Subject: BBB processing RE: Case ID 43616056

Attention: Owner/Manager

Here with the Better Business Bureau would like to notify you that we have been filed a complaint (ID 43616056) from your customer in regard to their dealership with you.

Please open the Complaint report below to view the details on this matter and let us know of your position as soon as possible.

We are looking forward to hearing from you.

Faithfully,

Gerard Johnson

Dispute Counselor
Better Business Bureau

As you can see, it would be easy for an unsuspecting business, concerned about keeping a high ranking with the BBB to open this.

The BBB recommends to anyone receiving such email:

• Do not open any attachments
• Do not click on any links
• Delete the email from your inbox, and then delete it again from your trash or recycling folder

The Better Business Bureau was founded in 1912 and is a private, nonprofit organization that provides programs of assistance to businesses and consumers.  Their focus is to promote ethical business practices by encouraging honest advertising and selling practices.  They also can serve as a neutral third party to settle marketplace disputes.  Their role in helping to resolve a buyer/seller complaint against a company is very helpful in many cases, and encourages corrections and improvements where appropriate. As the BBB states, “Our mission is to promote and foster the highest ethical relationship between businesses and the public through voluntary self-regulation, consumer and business education, and service excellence.”