Controller Suggestions for ABC Company - Math Problem Example

There are numerous lawsuits that are filed against companies dealing with building materials as a result of faulty products, which lead to ‘sick buildings’. The company risks paying huge fines if it is accused of selling products of this nature and fails to win the case. i. What does this statement of cash flow tell you about the sources and uses of the company? The cash flow statement above shows that the company largely relies on the operating activities for financing, and most of its expenditure goes to the operating activities.

Surprisingly, the company appears to have kept away from alternative investments, which could otherwise offer a reprieve to the cash flow challenges the company is experiencing. ii. Is there anything ABC Company can do to improve the cash flow? The ABC Company has many alternatives that can be used to improve its cash flow. The current cash situation is very bad especially because the company has focused on its operating activities to generate cash at the expense of alternative sources of cash.

Ideally, the company can use borrowed cash to finance in new and profitable ventures. Currently, there is no evidence of the company repaying any loan interest and hence opting for a loan will balance the company’s capital structure. The company should also ensure that the cash that is borrowed is used to finance operations that will boost the sales by a big margin, so that the cash inflow from operations can be boosted. iii. Can this project be financed with current cash flow from the company?

Why or why not? This project cannot get financing from the current cash flow from the company because it is not adequate. For instance, the current year’s cash flow statement revealed only $5,000 was left as the net balance. The anticipated project needs fiance to be sourced from outside, for example by borrowing from a bank or issuing new shares among other sources (Leary and Roberts 2575). iv. If the company needs additional financing beyond what the ABC Company can provide internally (either now or sometime throughout the life of the project), how would you suggest the company obtain the additional financing, equity or corporate debt, and why?

The company should obtain corporate debt since it is the best option to finance this particular project. Ideally, this is the best option as opposed to equity because there is some evidence that the company has already invested in equity because of the dividends being paid to the shareholders, yet there is no evidence of debt finance. Perhaps, to realize the maximum from the invested capital, the company should strike a good balance between equity and debt. Furthermore, obtaining financing by issuing more equity shares will water down the shareholders stake and this could not be in the interest the shareholders.

Therefore, it would be advisable for the company to obtain corporate debt so long as the benefits that will be realized from such financing will outweigh the interest paid for the debt (Leary and Roberts 2575). III. Product cost a. What is the product cost for the expansion product? Expansion Product (estimate) Selling Price ? Units produced and expected to be sold 5,000 Machine Hours 5,000 Direct Materials 28,000 Direct labor dollars