Use the following statement of cash flowsfor Star Pharmaceuticals ...

[jrubin]

Use the following statement of cash flowsfor Star Pharmaceuticals to:
 
  a. prepare a summary analysis of the statement of cash flows,
   b. analyze cash flow from operating activities, and
   c. analyze the cash inflows and cash outflows.
 
  Star Pharmaceuticals
  Statement of Cash Flows
  For the Years Ended December 31, 2015 and 2014
 
  (in millions) 2015 2014
  Cash flows from operating activities (CFO):
  Net income 5,800 3,300
  Adjustments to reconcile net income to CFO:
   Depreciation and amortization 550 360
   Deferred income taxes 10 (580)
   Stock-based compensation 590 170
  (Increase) decrease in operating assets and liabilities:
   Accounts receivable (490) (380)
   Inventories (6,900) (1,960)
   Other current assets 410 (480)
   Accounts payable 700 690
   Income taxes payable 250 140
   Accrued liabilities 170 (290)
  Net CFO 1,090 970
  Cash flows from investing activities:
   Purchases of property and equipment (740) (750)
   Acquisitions 0 (350)
  Net cash used by investing activities (740) (1,100)
  Cash flows from financing activities:
   Proceeds from common stock sales 2,000 580
   Repayment of short-term line of credit 0 (140)
   Repayment of long-term debt (70) (70)
  Net cash provided by financing activities 1,930 370
  Net increase in cash 2,280 240
  Beginning cash balance 980 740
  Ending cash balance 3,260 980

Question 2

Explain what the debit to the Payroll Tax Expense account consists of, how it is determined, and when it is recorded.

[aadams68]

Answer to Question 1

a.
Star Pharmaceuticals
Summary Analysis of the Statements of Cash Flows

2015  2014
Inflows:
Cash from operations 1,090 35 970 63
Proceeds from common stock sales 2,000 65 580 37
Total Inflows 3,090 100.0 1,550 100.0
Outflows:
Purchases of plant and equipment 740 91 750 57
Acquisitions 0 0 350 27
Repayment of short-term line of credit 0 0 140 11
Repayment of long-term debt 70 9 70 5
Total Outflows 810 100.0 1310 100.0

Change in cash 2,280 240
b. Star Pharmaceuticals has generated an increasing dollar amount of cash from operations (CFO) from 2014 to 2015, but CFO has been significantly smaller than the net income the firm has produced each year. Reasons for this are the constantly increasing accounts receivables and the significant increases in the inventory account. Accounts payable has increased to support the increase in accounts receivable and inventory. In 2014, deferred income taxes, other current assets and accrued liabilities also used cash, causing CFO to be lower. This pattern is generally seen in companies unable to manage their working capital well, or in firms that are new or expanding. Most likely Star Pharmaceuticalsfall s into the latter category based on the large increase in net income.

c. Star Pharmaceuticals has generated all excess cash from operations or sales of common stock. Since stock sales contributed the majority in 2015 this may be a sign that investors view the firm favorably.

The firm has spent cash on purchases of property and equipment, acquisitions and repayment of both short and long-term debt. These are all appropriate uses of cash.

The trend is upward for both net income and CFO and the ending cash balance has increased due to the cash received from stock sales. The firm appears to be doing well and once inventories are sold (decreasing) rather than being stockpiled, further improvement will occur in CFO.

Answer to Question 2

The debit to the Payroll Tax Expense account consists of the sum of the employer's tax liabilities for FICA and federal and state unemployment tax. The employer's FICA tax is determined by multiplying the totals of the Social Security and Medicare Taxable Earnings columns of the payroll register by the applicable tax rates. Federal and state unemployment taxes are determined by multiplying the total of the Unemployment Taxable Earnings column by the respective federal and state unemployment tax rates. An assumption is made that the same taxable earnings exist for federal and state unemployment. The entry to record Payroll Tax Expense is made at the time the payroll entry is made for each pay period.

[jrubin]

Thank you

[aadams68]

Happy to help you