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Dianmondz Corp report - Essay Example

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Dianmondz Corp report

To Anoop and Meli, cash flow is very important as it translates the earnings reported in the company’s income statement which is subject to accounting decisions and reporting regulations- into a simple summary of how much cash has been generated by the company during the stated financial period (Porter and Norton 674). Cash flow statement also plays a huge role in facilitation of decision making by the provision of judgments on the financial condition, profitability and company’s financial management. The cash flow statement for Diamondz has a net decrease in cash of 25,000 which indicates that the financing and investing activities were more than the cash inflow during the year which may be an indication of a poor financial performance on the company. b. Issuing equity and issuing debt to finance the construction and purchase of equipment is both advantageous and disadvantageous. The advantages of issuing debt are it is better when the financing is a short term one, it provides a tax shield, and it acts as a signal of the strength of a company (Porter and Norton 674). The disadvantages of issuing debt are that it increases the risk level of the company, the assets of the company may be used as collateral, and the debt has to be paid and hence the need to have positive and stable cash flow. The advantages of issuing equity to purchase equipment include the fact that equity does not have any maturity date and the company does not have any obligation to redeem, equity also enhances creditworthiness of the company as it cushions the lenders and dividends from equity are exempted from tax (Porter and Norton 674). The cost of issuing equity is very high, and the sale of equity shares to outsiders usually dilutes the control enjoyed by the existing owners-this is some of the disadvantages of issuing equity. For Diamondz, there are other viable options available to them for example; a loan from the bank would be a viable option to help them in financing the construction and purchase of the equipment. Based on the 2012 financial statement, the company can acquire a bank loan to perform its operations. c. The debt to equity ratio for Diamondz Corp was 1.264 in 2011 and 1.863 in 2012. This indicates that there was an increase in the proportion of debts used by the company in financing its assets. The ratio for 2011 and 2012 also shows that the company was somehow aggressive in using debt to finance its growth. If the company issues debt, debt to equity ratio will increase since there will be an increase the total liabilities of the company which is more than the shareholders equity (Porter and Norton 674). Issuing equity by Diamondz Corp would lead to an increase in the shareholders equity more than the total liabilities which would then result into a reduction in debt to equity ratio. d. The fact that Anoop’ ...Show more
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Name: Institution: Professor: Date: Diamondz Corp report 1. Cash flow statement for the year ended 31 December 2012 using the indirect method Operating activities Net income 50,000 Adjustments to reconcile cash Depreciation expense 60,000 Loss on sale of equipment 10,000 Changes in current accounts Decrease in accounts receivable (41,000) Increase in prepaid expenses (9,000) Increase in accounts payable 5,000 Increase in salaries payable 5,000 Decrease in taxes payable (10,000) Cash inflow from operating activity 70,000 Investing activities Purchase of equipment (125,000) Proceeds from the sale of equipment 20,000 Proceeds from the sale of land 90,000 Cash used by investing activities (15,000…
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