Accounting Two Essay

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Accounting II

ABC Overall risk profile

The ABC Company may face series of risks based on the current industry and economic issues. First, the company is operating in a competitive market environment making the company to face a fierce competition from other companies producing similar products. Thus, the ABC Company may likely to lose some of its customer to competitors if the price per product is too high.

Moreover, the current recession may affect the purchasing power of customer, which may affect the company annual revenue. Moreover, inflation is likely to increase the cost of production. Another risk issue is that the company should satisfy its shareholders by declaring high dividends and failure to satisfy the shareholder may make some shareholders to disinvest their fund from the company, which may make the company to lose the public image. (Daniel, Njikizana, . & Chamboko, 2011).

Current ABC cash flow using Direct Method

ABC Statement of Cash Flow using Direct Method

CASH FLOWS FROM OPERATING ACTIVITIES

Payments Received from Customers

1,200,000.00

Payment to supplier and vendors

-250,000.00

Payments to Vendors and Suppliers

Cash generated from operations

170,000.00

Interest paid

-70,000.00

Income tax paid

-70,000.00

Dividends paid

-100,000.00

Net Cash Provided (Used) by Operating Activities

880,000.00

CASH FLOWS FROM INVESTING ACTIVITIES

Business acquisitions, net of cash acquired

0

Purchase of property, plant and equipment

-100,000.00

Proceeds from sale of equipment

0

Acquisition of portfolio investments

0

Investment income

220,000.00

0

Net Cash Provided (Used) by Noncapital Financing Activities

120,000.00

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issue of share capital

240,000.

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00

Proceeds from long-term borrowings

0

Payment of long-term borrowings

0

Net Cash used in Financing Activities

240,000.00

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from Sales and Maturities of Investments

0

Investment Income

0

Purchase of Investments and Related Fees

0

Net Cash Provided (Used) by Investing Activities

0

Net Increase (Decrease) in Cash and Cash Equivalents

1,240,000.00

Cash and Cash Equivalents,

1,240,000.00

b.

i. The cash flow reveals that source of fund of ABC are from cash received from the sale of products, which is $1.2 million. Typically, the company receives the bulk of its fund from this source. Moreover, the company receives fund from investment income and shares bought by investors. Moreover, the company used the fund to invest.

ii. The strategy the company can do to improve the cash flow is to indulge in a long-term borrowing in order to use the cash for long-term investment, which will generate income for the company.

iii. Yes, the company can finance the project with the current cash flow because the company still has net cash and equivalent of $1,240,000.

iv. The best method for to raise additional financing is to issue the corporate debt because this type of debt carries low interests rate which can be appropriate for the company to finance its project.

a. The product cost for the ABC company under the variable costing and absorption costing for the expansion product are as follows:

Expansion Product

Variable Costing

Absorption costing

Direct Material

$5.60

$5.60

Direct Labor.....

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