Construction of the cash flows - Essay Example

The users of the financial statements are very interested to learn how the business generates and uses it cash and cash equivalents during a particular period. Thus, the statement of cash flows is very important because the company wants to control the timing of the receipt and disbursement of cash. For, the company needs cash inflows to pay the budgeted and maturing cash outflows such as payables. The cash flow statement clearly shows the company management's ability to juggle the incoming and outgoing of funds.

Also, cash inflows from operating activities are defined as those coming from it revenue generating activities. In our case, the airline tickets are bought because they need to visit the different revenue generating shops in different parts of the United States. Capital Budgeting (Maher, 1997; 279-20) involves deciding which long term investment to undertake and how they are financed. Examples are buildings, land, factory site, factory equipment and others. Furthermore, an item is capitalized, meaning recorded as building, equipment, factory and others, if they are tangible assets held by the enterprise for use of production of goods for sale and rendering services.

And, the asset bought will be used over a period of more than one year. Thus, the airline tickets only benefit the day or the current accounting period when the flight was taken. Thus, the airline tickets do not fall under capital expenditures but only operating expenses. In the construction of the cash flows associated with the commercial airline contract option, should the analyst include the average cost of business class tickets Yes, because the average cost of business class tickets involves cash flow or cash disbursement or cash payment.

As discussed above in the theory of accounts it is part of operating expenses in the cash flow statement.Appendix A shows that for an annual average of 48 annual trips consisting of 4 travelers per trip at $1,000 per round trip ticket, the annual cost for this specific year is $192,000. Also, for the following year at 50 trips at 4 persons per trip the total cost for that year in terms of plant tickets is $200,000. the continues the computation until the year reaches 79 flights in 1 year at 4 persons per year totaling $316,000.

QUESTIONIn construction of the cash flows associated with the commercial airline contract option, should the analyst include the cost of upgrading a business class fare to a first class ticket yes, for the same reason above. The average cost of upgrading a business class ticket to a first class ticket involves cash flow or cash disbursement or cash payment. As discussed in the theory of accounts, it is part of operating expenses of the company to support its day to day operational managementAppendix B below shows that for the year when there are 48 airline travels consisting of 4 persons per trip, the first class ticket at $1,300 per ticket will increase the ticket cost on this particular year to $249,600.

This is $57,600 bigger than the computation of ticket at costs in Appendix A below. Also, for the year when 50 flights with 4 persons at $1,300 first class, the total airline ticket costs for that year is $260,000 which is higher than the above data by where the business class total cost for the year is only $200,000.