8. [Statement of Cash Flows and Cash Burn or Build] Salza Technology Corporation increased its sales from $375,000 in 2015 to $450,000 in 2016 as shown in the firm's income statements presented below. LeAnn Sands, chief executive officer and founder of the firm, expressed concern that the cash account and the firm's marketable securities declined substantially between 2015 and 2016. Salza's complete bal- ance sheets are also shown. Ms. Sands is seeking your assistance in the preparation of a statement of cash flows for Salza Technology. A. Prepare a statement of cash flows for 2016 for Salza Technology Corporation. B. Provide a brief description of what happened in terms of cash flows (both inflows and outflows) for Salza between 2015 and 2016.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
![8. [Statement of Cash Flows and Cash Burn or Build] Salza Technology Corporation increased its sales
from $375,000 in 2015 to $450,000 in 2016 as shown in the firm's income statements presented below.
LeAnn Sands, chief executive officer and founder of the firm, expressed concern that the cash account
and the firm's marketable securities declined substantially between 2015 and 2016. Salza's complete bal-
ance sheets are also shown. Ms. Sands is seeking your assistance in the preparation of a statement of
cash flows for Salza Technology.
A. Prepare a statement of cash flows for 2016 for Salza Technology Corporation.
B. Provide a brief description of what happened in terms of cash flows (both inflows and outflows) for
Salza between 2015 and 2016.
SALZA TECHNOLOGY CORPORATION
ANNUAL INCOME STATEMENTS FOR YEAR ENDED DECEMBER 31 (IN $ THOUSANDS)
2015
2016
Net sales
$375
$450
Less: Cost of goods sold
Gross prafit
Less: Operating expenses
Less: Depreciation
-225
-270
150
180
-46
-46
-30
Less: Interest
Income before taxes
100
Less: Income taxes
Net income
-30
70
Cash dividends
$ 17
$ 20](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff26ec4dc-b7f7-464a-b87b-bd5e9d90c522%2F99942b21-8c40-4c24-94a1-b7f25d92574a%2Fk70h957_processed.png&w=3840&q=75)
![BALANCE SHEETS AT END OF DECEMBER 31 (IN S THOUSANDS)
2015
2016
Cash
$ 39
$ 16
Accounts receivable
50
80
Inventories
151
204
240
300
Total current assets
Grass fixed assets
200
290
Less accumulated
-125
depreciation
Net fixed assets
105
165
Total assets
$345
$465
$ 10
$ 45
Accounts payable
Bank loan
20
27
Accrued liabilities
10
23
Total current liabilities
60
95
Long-tem debt
Common stock
Retained earnings
Tatal liabilities and equity
15
15
120
235
$465
185
$345
C. Use your calculations from Part A for cash flows from operating and investing activities to indicate
the extent to which Salza was building or burning cash in 2016.
D. Convert the 2016 annual cash build or cash burn to a monthly rate. If cash flow activities relating to
operations and investing for 2016 continue into 2017, indicate (1) how long it will be before Salza
runs out of cash (if Salza is burning cash) or (2) the expected 2017 year-end cash account balance
if Salza is building cash. Assume no changes in cash flows from financing activities in 2017 for cal-
culation purposes.
9. [Survival Revenues Breakeven] LeAnn Sands wants to conduct revenue breakeven analyses of Salza
Technology Corporation for 2016. Income statement information is shown in Problem 8. For 2016, the
firm's cost of goods sold is considered to be variable costs, and operating expenses are considered to be
fixed cash costs. Depreciation expenses in 2016 also are expected to be fixed costs. Calculate Salza's
EBDAT breakeven in terms of survival revenues for 2016.
10. [Survival Revenues Breakeven] LeAnn Sands has reason to believe that 2017 will be a replication of 2016
(see Problem 8) except that cost of goods sold is expected to be 65 percent of the estimated $450,000 in
revenues. Other income statement relationships are expected to remain the same in 2017 as they were in
2016. Calculate the EBDAT breakeven point for 2017 for Salza in terms of survival revenues.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff26ec4dc-b7f7-464a-b87b-bd5e9d90c522%2F99942b21-8c40-4c24-94a1-b7f25d92574a%2Fym7bdqd_processed.png&w=3840&q=75)
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