91Ó°ÊÓ

The cash flow statement is a company's statement prepared at the end of the accounting period that shows the changes in the company's cash and cash equivalents.

Even though the preceding year's income was $821,432 ($838,955 - $17,523) greater than the current year's income, the current year's cash flow from operations was $937,437 greater than the prior year's cash flow from operations [$236,480 - ($700,957)]. This seeming paradox is to be explained by analyzing operating operations' elements of net cash flow. Depreciation and amortization add-back of $316,416 versus $181,348 in the prior year and accounts payable growth of $2,017,059 in the current year versus reduction of $284,567 in the prior year both significantly contributed to the positive cash flow figure in the current year.

The majority of the cash rise can be attributed to the company's substantial increase in accounts payable because an increase in accounts payable leads to an increase in net cash from operating activities. An investor or creditor would want to look into this rise to ensure the business is not behind on payments. It should be noted, though, that inventories did rise by $1,599014.

For current year

Computing Liquidity ratio

$\begin{array}{c}\mathbf{Liquidity}\mathbf{\text{ }}\mathbf{ratio}\mathbf{=}\frac{\mathbf{Net}\mathbf{\text{ }}\mathbf{cash}\mathbf{\text{ }}\mathbf{provided}\mathbf{\text{ }}\mathbf{by}\mathbf{\text{ }}\mathbf{operating}\mathbf{\text{ }}\mathbf{activities}\mathbf{\text{ }}}{\mathbf{Average}\mathbf{\text{ }}\mathbf{current}\mathbf{\text{ }}\mathbf{liabilities}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{236}\mathbf{,}\mathbf{480}}{\left[\frac{\left(\$4,055,465+\$1,995,600\right)}{2}\right]}\\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{078}\mathbf{:}\mathbf{1}\end{array}$

Computing Solvency ratio

$\begin{array}{c}\mathbf{Solvency}\mathbf{\text{ }}\mathbf{ratio}\mathbf{=}\frac{\mathbf{Net}\mathbf{\text{ }}\mathbf{cash}\mathbf{\text{ }}\mathbf{provided}\mathbf{\text{ }}\mathbf{by}\mathbf{\text{ }}\mathbf{opearting}\mathbf{\text{ }}\mathbf{activities}}{\mathbf{Average}\mathbf{\text{ }}\mathbf{total}\mathbf{\text{ }}\mathbf{liabilities}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{236}\mathbf{,}\mathbf{480}}{\left[\frac{\left(\$4,620,085+\$2,184,386\right)}{2}\right]}\\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{070}\mathbf{:}\mathbf{1}\end{array}$

Computing Profitability ratio

$\begin{array}{c}\mathbf{Profitability}\mathbf{\text{ }}\mathbf{ratio}\mathbf{=}\frac{\mathbf{Net}\mathbf{\text{ }}\mathbf{cash}\mathbf{\text{ }}\mathbf{provided}\mathbf{\text{ }}\mathbf{by}\mathbf{\text{ }}\mathbf{operating}\mathbf{\text{ }}\mathbf{activities}}{\mathbf{Net}\mathbf{\text{ }}\mathbf{sales}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{236}\mathbf{,}\mathbf{480}}{\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{560}\mathbf{,}\mathbf{566}}\\ \mathbf{=}\mathbf{1}\mathbf{.}\mathbf{15}\mathbf{\%}\end{array}$

These ratios are all incredibly low. However, this is expected given the early phases of development of a company like the Vermont Teddy Bear Company. A company won't normally produce much net cash flow from operating activities when launching its main product. The company's cash position should be regularly monitored due to the unstable nature of businesses at this point of their development to ensure that it does not enter a financial crisis due to a lack of cash.