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    XYZ Corporation: managing a cash flow deficiency

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    Please see attached file for answers.

    NOTE: The original cash flow included in the assignment is NOT correct (NOT BALANCE). Please double check the figures.

    As a result of the expected $2 million increase in the company's accounts receivable, its expected cash flow from operations without any working capital management plan is a negative $1.77 million, as shown below, which resulted to a cash deficiency of $1.37 million.

    XYZ Corporation
    Statement of Cash Flows
    For the Year Ended Dec. 31, 20xx
    Increase in Accounts Receivable by 2M
    Cash Flows from Operating Activities:
    Net Income $455,000
    Less: Increase in Accounts Receivable ($2,300,000)
    Add: Increase in Accounts Payable $50,000
    Add: Increase in Interest Payable $25,000
    Add: Decrease in Accounts Receivable $0
    Add: Increase in Notes Payable $0
    Add: Increase in Inventory $0 ($2,225,000)
    Net Cash Flows from Operating Activities ($1,770,000)
    Cash Flows from Investing Activities:
    Investment in Plant & Equipment
    Net Cash Flows from Investing Activities
    Cash Flows from Financing Activities:
    Issuance of Common Stock $200,000
    Payment of Notes Payable
    Net Cash Flows from Financing Activities $200,000
    Net Increase (Decrease) in Cash ($1,570,000)
    Cash Balance, Beginning $200,000
    Cash Balance, Ending ($1,370,000)

    In managing this deficiency, XYZ Corporation has three options: access a $1 million credit line and reduce inventory by $1 million; slow down payments to suppliers by $2 million; and factor $5 million accounts receivable at a 15 per cent discount.

    OPTION 1. This option results to an ending cash balance of $630,000. Net income for this option is reduced to $285,000 as a result of the 7 per cent interest charged on the credit line. This option might not be feasible as a drastic migration to a ...

    Solution Summary

    The solution examines how to manage cash flow deficiencies.