Q: On Slide 57, I believe it should be “decrease” in prepaid expenses and not “increase”.
A: While there is no reference to the increase in prepaid expenses on Slide 57, the second to the last bullet point on Slide 56, to which I believe you are referring, states “$224,179 cash outflow from increase in prepaid expenses.” Looking at the year-over-year balance sheets, prepaid expenses increased by $224,179. An increase in an asset account is a cash outflow – which is why this is deduction (a decrease) in the UCA cash flow illustrated on Slide 52.
Q: I wanted to ask a question regarding Poll Question 6 on the first way out. Why does Cash after Debt Repayment go down by the $421,706, regardless of how it’s classified, if the company doesn’t pay it? Since the cash never leaves their account – they haven’t paid it yet – why does the cash flow change?
A: Poll Question 6 reads as follows:
“ Even though Sequoia Properties did not have sufficient profit to meet its debt service in 2014, its $298,163 surplus at Cash after Debt Repayment means that it did, in fact, meet its debt service from business cash flow.
The correct answer is “Agree”. The $421,706 increase in accrued expenses was a key to generating this surplus cash flow.
To clarify, the $421,706 increase in accrued expenses is an increase in a liability account. When a liability account increases, it is a cash inflow or a cash relief because expenses reported on the income statement are not paid but, rather, deferred and paid later. So cash available to the company actually increased, not decreased, by this increase in accruals.
In effect, by not paying these expenses, the company effectively managed its cash flow by retaining this amount of cash in the company. This certainly helped them generate the cash necessary to meet their debt repayment, leaving a $298,163 surplus at Cash after Debt Repayment. You can see the impact of the change in accruals (a cash inflow) of $421,706 and the resulting Cash after Debt Repayment of $298,163 best by reviewing Slide 52, the full UCA cash flow statement.