The cash flow data of Palomba Pizza Stores for the year ended December 31 1999 are as follows

QUESTION

The cash flow data of Palomba Pizza Stores for the year ended December 31, 1999, are as follows: Cash payment of dividends $ 35,000 Purchase of land 14,000 Cash payments for interest 10,000 Cash payments for salaries 45,000 Sale of equipment 38,000 Retirement of common stock 25,000 Purchase of equipment 30,000 Cash payments to suppliers 85,000 Cash collections from customers 250,000 Cash at beginning of year 50,000
a. Prepare a statement of cash flows for Palomba in accordance with FAS 95 showing:
Net cash provided by operating activities.
Net cash provided by or used in investing activities.
Net cash provided by or used in financing activities.
b. Discuss, from an analysts viewpoint, the purpose of classifying cash flows into the three categories listed above.
Solution a. Statement of cash flows for Palomba in accordance with FAS 95 Statement of cash flows for Palomba Cash payment for salaries ($45,000) Cash payment to suppliers ($85,000) Cash collection from customers $250,000 Net cash provided by operating activities [A] $120,000 Purchase of land ($14,000) Sale of equipment $38,000 Purchase of equipment ($30,000) N et cash provided by or used in investing activities [B] ($6,000) Cash payment of dividends ($35,000) Cash payment for interest ($10,000) Retirement of common stock ($25,000) N et cash provided by or used in financing activities [C] ($70,000) Cash at beginning of the year $50,000 Cash flows during the year (A+B+C) $44,000 C ash at beginning of the year $94,000 b.

se of classifying cash flows into the three categories: Based on the classification, the analysts can understabnd the position of the company: 1. Generally if the operating cash flows are postive then thecompany is in growing or marure stage. 2. If the comapny is having huge cashflows in investing activities then the company is planning or undergoing growth 3. Cash flow from financing activities also provides a sense of how much cash flows are flowing through non-operating activities.

ANSWER:

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