Dev D felt the warm April breeze on his face as he traveled south on Highway 29 after finishing his interview at Neogi Chemicals, Inc. It was his second interview with Ajay Kumar, the owner of Neogi Chemicals, for the position of chief financial officer. Driving down the highway, Powers reflected on his conversation with Ajay Kumar as the interview came to a close. Ajay Kumar had said, “Dev, you have some skills we could really use. We have been growing quite a bit over the last couple of years, and we need more sophistication in the finance and accounting area. We are getting too big just to employ a bookkeeper. We need someone who can help us think intelligently about the financial future of the business. Let me pencil out an offer and get back with you in the next couple of days.” Encouraged by Ajay Kumar’s comments, Dev had responded, “This sounds great, Ajay. I wonder if I might get a copy of the company’s financial statements to take with me. I would like to look them over. You know—just to see what things look like.” Ajay had disappeared down the hall into the bookkeeper’s office and then returned with several pages for Dev to take with him. “Here’s a complete set of the financial statements for our 2006 year.” Dev was inspired by the conversation and excited about the position’s potential. After working in several large organizations, he had developed an interest in smaller businesses. And he had a keen interest in the outdoors, landscaping, and watching things grow each year as the seasons changed. Dev understood the opportunity that the area’s booming residential construction presented for a company like Neogi Chemicals, and he was sure he could help the company make the most of it. He just hoped that the company’s financial condition could support having him on staff, so he planned to dig into its financial statements to see how things looked after he got home later that day. The Financial Statements Late that afternoon, Dev went into his study and spread the financial statements out on his desk: Neogi Chemicals ’s income statement for the year ended December 31, 2006 (Exhibit 1) and the company’s balance sheet as of December 31, 2006 (Exhibit 2). “Interesting,” said Dev to the empty room. “An income statement and a balance sheet but no statement of cash flow. But Ajay said this was a complete set of financial statements for 2006. I suppose I will have to create a statement of cash flow myself.” Dev recalled that Ajay had talked about having purchased some new equipment during the past year to support the growing business, and he had beamed when he talked about the deal he had struck—$75,000 for some equipment that was only three years old and that had had very little use—a deal too good to pass up. At the same time, Ajay had also mentioned that he had sold some equipment that was no longer used for its book value of $25,000. Finally, he had indicated that the company had paid dividends of $20,000 to the owners in 2006. Keeping those figures in mind, Dev began to create a statement of cash flow for Neogi Chemicals . Exhibit 1 NEOGI CHEMICALS, INC.: STATEMENT OF CASH FLOW Income Statement for the Year Ended December 31, 2006 Revenues $2,181,250 Cost of merchandise sold 1,110,600 Gross margin 1,070,650 Operating expenses: Rent expense 120,600 Utilities expense 60,350 Phone expense 6,100 Salary and wage expense 650,000 Depreciation expense 20,000 Marketing expense 41,000 Total operating expense 898,050 Operating income 172,600 Interest expense 9,000 Income before taxes 163,600 Income-tax expense 57,300 Net income $ 106,300 Exhibit 2 NEOGI CHEMICALS, INC.: STATEMENT OF CASH FLOW Balance Sheet for the Years Ended December 31, 2005, and December 31, 2006 Current assets: December 31, 2005 December 31, 2006 Cash $ 47,950 $ 45,600 Accounts receivable 655,000 700,000 Inventory 234,700 250,000 Total current assets 937,650 995,600 Equipment 160,000 190,000 Total assets $1,097,650 $1,185,600 Current liabilities: Accounts payable 510,000 530,000 Utilities payable 19,000 18,250 Salary and wages payable 9,750 10,000 Income tax payable 7,100 7,250 Total current liabilities 545,850 565,500 Noncurrent liabilities: Loan payable 172,000 154,000 Total liabilities 717,850 719,500 Owners’ equity: Capital stock 240,000 240,000 Retained earnings 139,800 226,100 Total liabilities and owners’ equity $1,097,650 $1,185,600 Questions: 1. Using the financial statements and additional information provided in the case, prepare the 2006 statement of cash flow for Neogi Chemicals , Inc.; 2. Analyze the statement of cash flow that you have prepared? (your answer should be in 3-4 bullet points)
Dev D felt the warm April breeze on his face as he traveled south on Highway 29 after
finishing his interview at Neogi Chemicals, Inc. It was his second interview with Ajay Kumar, the
owner of Neogi Chemicals, for the position of chief financial officer.
Driving down the highway, Powers reflected on his conversation with Ajay Kumar as the
interview came to a close. Ajay Kumar had said, “Dev, you have some skills we could really use.
We have been growing quite a bit over the last couple of years, and we need more sophistication
in the finance and accounting area. We are getting too big just to employ a bookkeeper. We need
someone who can help us think intelligently about the financial future of the business. Let me
pencil out an offer and get back with you in the next couple of days.” Encouraged by Ajay Kumar’s
comments, Dev had responded, “This sounds great, Ajay. I wonder if I might get a copy of the
company’s financial statements to take with me. I would like to look them over. You know—just
to see what things look like.” Ajay had disappeared down the hall into the bookkeeper’s office and
then returned with several pages for Dev to take with him. “Here’s a complete set of the financial
statements for our 2006 year.”
Dev was inspired by the conversation and excited about the position’s potential. After
working in several large organizations, he had developed an interest in smaller businesses. And he
had a keen interest in the outdoors, landscaping, and watching things grow each year as the seasons
changed. Dev understood the opportunity that the area’s booming residential construction
presented for a company like Neogi Chemicals, and he was sure he could help the company make
the most of it. He just hoped that the company’s financial condition could support having him on
staff, so he planned to dig into its financial statements to see how things looked after he got home
later that day.
The Financial Statements
Late that afternoon, Dev went into his study and spread the financial statements out on his
desk: Neogi Chemicals ’s income statement for the year ended December 31, 2006 (Exhibit 1)
and the company’s
“Interesting,” said Dev to the empty room. “An income statement and a balance sheet but no
statement of
suppose I will have to create a statement of cash flow myself.”
Dev recalled that Ajay had talked about having purchased some new equipment during the
past year to support the growing business, and he had beamed when he talked about the deal he
had struck—$75,000 for some equipment that was only three years old and that had had very little
use—a deal too good to pass up. At the same time, Ajay had also mentioned that he had sold some
equipment that was no longer used for its book value of $25,000. Finally, he had indicated that the
company had paid dividends of $20,000 to the owners in 2006. Keeping those figures in mind,
Dev began to create a statement of cash flow for Neogi Chemicals .
Exhibit 1
NEOGI CHEMICALS, INC.: STATEMENT OF
CASH FLOW
Income Statement for the Year Ended December 31, 2006
Revenues $2,181,250
Cost of merchandise sold 1,110,600
Gross margin 1,070,650
Operating expenses:
Rent expense 120,600
Utilities expense 60,350
Phone expense 6,100
Salary and wage expense 650,000
Marketing expense 41,000
Total operating expense 898,050
Operating income 172,600
Interest expense 9,000
Income before taxes 163,600
Income-tax expense 57,300
Net income $ 106,300
Exhibit 2
NEOGI CHEMICALS, INC.:
STATEMENT OF CASH FLOW
Balance Sheet for the Years Ended December 31, 2005, and December 31,
2006
Current assets:
December 31, 2005 December 31, 2006
Cash $ 47,950 $ 45,600
Inventory 234,700 250,000
Total current assets 937,650 995,600
Equipment 160,000 190,000
Total assets $1,097,650 $1,185,600
Current liabilities:
Accounts payable 510,000 530,000
Utilities payable 19,000 18,250
Salary and wages payable 9,750 10,000
Income tax payable 7,100 7,250
Total current liabilities 545,850 565,500
Noncurrent liabilities:
Loan payable 172,000 154,000
Total liabilities 717,850 719,500
Owners’ equity:
Capital stock 240,000 240,000
Total liabilities and owners’ equity $1,097,650 $1,185,600
Questions:
1. Using the financial statements and additional information provided in the case, prepare
the 2006 statement of cash flow for Neogi Chemicals , Inc.;
2. Analyze the statement of cash flow that you have prepared? (your answer should be in
3-4 bullet points)
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