Leach/Melicher Entrepreneurial Finance Fourth Edition - Chapter 4 (Pg. 143-144): Exercise 6 - Statement of Cash Flows and Cash Burn or Build

Cindy and Rob Castillo founded the Castillo Products Company in 2008. The company manufactures components for personal decision assistant products and for other handheld electronic products. Year 2009 proved to be a test of the Castillo Products Companys ability to survive. However, sales increased rapidly in 2010 and the firm reported a net income after taxes of $75,000. Depreciation expenses were $40,000 in 2010. Following are the Castillo Products Companys balance sheets for 2009 and 2010.

CASTILLO PRODUCTS COMPANY
	2009	2010
Cash	$50,000	$20,000
Accounts Receivable	200,000	280,000
Inventories	400,000	500,000
Total current assets	650,000	800,000
Gross Fixed Assets	450,000	540,000
Accumulated Depreciation	-100,000	-140,000
Net Fixed Assets	350,000	400,000
Total Assets	$1,000,000	$1,200,000
Accounts payable	$130,000	$160,000
Accruals	50,000	70,000
Bank Loan	90,000	100,000
Total Current Liabilities	270,000	330,000
Long-term Debt	300,000	400,000
Common Stock ($.01 par)	150,000	150,000
Additional Paid-In-Capital	200,000	200,000
Retained Earnings	80,000	120,000
Total Liabilities and Equity	$1,000,000	$1,200,000

A) Calculate Castillos cash flow from operating activities for 2010.

B) Calculate Castillos cash flow from investing activities for 2010.

C) Calculate Castillos cash flow from financing activities for 2010.

D) Prepare a formal statement of cash flows for 2010 and identify the major cash inflows and outflows that were generated by the Castillo Products Company.

E) Use your calculation results from Parts A and B to determine whether Castillo was building or burning cash during 2010 and indicate the dollar amount of the cash build or burn.

F) If Castillo had a net cash burn from operating and investing activities in 2010, divide the amount of burn by 12 to calculate an average monthly burn amount. If the 2011 monthly cash burn continues at the 2010 rate, indicate how long in months it will be before the firm runs out of cash if there are no changes in financing activities.