Investing and Financing Activities – Using Cash Flow Information

The investing activities section of the statement of cash flows summarizes the cash inflows from disposing of investments, and the cash outflows from purchasing investments. Altron’s investments (both short-term and long-term) consist primarily of government and municipal bonds. The short-term investments, in particular, are highly liquid and readily available to satisfy pending cash needs.In 1997, Altron purchased investments for $14,920,000 and liquidated investments of $21,577,000, resulting in a net decline in investments of $6,657,000.

The investing activities section also shows that Altron spent $25,944,000 on capital expenditures. Most of this amount was for a new 100,000 square foot manufacturing plant.The 1996 year-end balance sheet shows a property, plant, and equipment (PPE) figure of $45,727,000. Thus,Altron made a considerable investment in PPE during 1997.Altron is in an industry that requires firms to stay up-to-date in terms of technology.

However, Altron should not increase its investment in high technology facilities to such an extent that its profitability and/or cash flows are ultimately compromised. Cause for concern is further heightened by the 1996 cash flow statement, which shows capital expenditures of $21,175,000. Summing over 1996 and 1997, Altron has spent about $47 million on capital improvements. This amount is approximately equal to 70% of the PPE figure on the 1997 balance sheet! Questions certainly arise regarding the necessity for Altron to continue such expenditures, as well as its ability to do so.

So far, we have learned the following about Altron’s 1997 cash flows:

Cash provided by operating activities = $14,428,000
Net cash generated by liquidating investments = $ 6,657,000
Cash paid for capital improvements = $ (25,944,000)
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Net cash outflow (excluding financing activities) = $ (4,859,000)

The financing activities section shows two items.Altron issued common stock in exchange for approximately $1,086,000.Altron also received an income tax benefit related to its stock option plans.These two financing activities were not sufficient to fund the $4,859,000 outflow. Consequently, the cash balance declined:

Net cash outflow (excluding financing activities) = $ (4,859,000)
Net cash provided by financing activities = 1,836,000
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Net change in cash and cash equivalents = $ (3,023,000)

A $3 million decline in cash and cash equivalents is not an extremely large drop. Moreover,Altron has a considerable investment in government securities that can be liquidated. Also, Altron does not have much debt outstanding, and therefore would likely have little trouble in securing additional borrowings. Nevertheless, management’s plans for funding future capital expenditures should be examined.

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