This case is based on the statement of cash flows for Allison Corporation, illustrated on the next page. Use this statement to evaluate the companys ability to continue paying the current level of dividends - $40,000 per year. The following information also is available: 1. The net cash flows from operating activities shown in the statement are relatively normal for Allison Corporation. Net cash flows from operating activities have not varied by more than a few dollars in any of the past three years. 2. The net outflows for investing activities are unusually high because the company modernized its production facilities during the year. The normal investing cash outflow is about $45,000 per year, the amount required to replace existing plant assets as they are retired. Over the long run, marketable securities transactions and lending transactions have a very small impact on Allisons net cash flows from investing activities.3. The net cash flows from financing activities were unusually large in the current year because of the issuance of bonds payable and capital stock. These securities were issued to finance the modernization of the production facilities. In a typical year, financing activities include only short-term borrowing transactions and payments of dividends.

Questions:

(a) Solely on the basis of the companys past performance, do you believe the $40,000 annual dividend payments are secure? That is, does the company appear able to pay this amount in dividends every year without straining its cash position? Do you think it more likely that Allison Corporation will increase or decrease the amount of dividends that it pays? Explain fully.

(b) Should any of the unusual events appearing in the statement of cash flows for the current year affect your analysis of the companys ability to pay future dividends? Explain.

$ 880,000 (830,000) $ 50,000 ALLISON CORPORATION STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2015 Cash flows from operating activities: Cash received from customers $ 870,000 Interest and dividends received .. 10,000 Cash provided by operating activities Cash paid to suppliers and employees $ (764,000) Interest paid ..... (28,000) Income taxes paid ... (38,000) Cash disbursed for operating activities Net cash flows from operating activities Cash flows from investing activities: Purchases of marketable securities ... $ (65,000) Proceeds from sales of marketable securities 40,000 Loans made to borrowers (17,000) Collections on loans 12,000 Purchases of plant assets (160,000) Proceeds from sales of plant assets 75,000 Net cash flows from investing activities Cash flows from financing activities: Proceeds from short-term borrowing $ 45,000 Payments to settle short-term debts. (55,000) Proceeds from issuing bonds payable 100,000 Proceeds from issuing capital stock 50,000 Dividends paid ..... (40,000) Net cash flows from financing activities Net increase (decrease) in cash. Cash and cash equivalents, Jan. 1, 2015 ... Cash and cash equivalents, Dec. 31, 2015.. (115,000) 100,000 $ 35,000 20,000 $ 55,000