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Case Analysis

873 words - 4 pages

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Prime Contractors |
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Thebeau, Nicholas R |
6/29/2015 |

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A. What evidence do you see in Exhibit 3.35 of Prime’s strategic shift from refuse to animal care services?

Aside from year 8, Prime is generating persistent and large net income figures. However, during year 8 there is a large amount of depreciation, signifying large capital investments. Specifically, in years 6 through 7 the company invested roughly $3M in fixed assets. Based on this information I would say that the company was preparing for growth and purchased the assets to jump into the animal care services industry. They financed their investments through debt shown under the financing side of the ...view middle of the document...

Vice versa, any decrease in a deferred tax asset or increase in a deferred tax liability is added back to net profit (loss).

The other accounts such as accounts receivable and payable are due to accrual accounting. Accounting for a sale or a liability but not actually receiving cash or dispersing it, respectively.
Because of accrual accounting and the non-cash items is why there is a difference in net income and cash flow from operations.

C. Discuss how Prime’s net income could increase between year 8 and 10 while its cash flow from operations decreased

Again, by referencing my above description, a large component found in years 8 through 10
* adding back depreciation expense found on the income statement (non-cash item)
* deferred taxes (non-cash item): Any increase in a deferred tax asset or decrease in a deferred tax liability is subtracted as part of adjustments to net income (loss)
* account receivable and payable (accrual accounting, accounting for the sale and liability but not actually receiving cash or dispersing it).

D. What is the likely reason that the adjustment for deferred income taxes when converting net income to cash flow from operations was an addition in year 6 to 8 but a subtraction in year 9 and 10

Another major account impacting Prime’s cash flow statement is deferred income taxes. Deferred tax is a non-cash item; under the indirect method, deferred taxes are shown in the operating cash flow section as an adjustment to...

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