Condensed net income and cash flow information follow for a recent year for two coffee companies, The Second Cup Ltd. and Starbucks Corporation follows:
Instructions
(a) Compare the cash provided or used in each of the three activities by each company.
(b) Based on the information provided above, which company appears to be in the stronger position? Explain the reasoning behind your decision.
SOLUTION
(a) Although Second Cup had a loss from the year, it managed to generate positive cash flows from operating activities. The overall decrease in cash was absorbed by the high beginning balance of cash leaving an ending cash balance that is severely reduced.
Starbucks provided cash from operating activities that nearly equalled the amount of cash consumed by investing and financing activities. The company generated 36% more cash from operating activities than net income [($3,749.1– $2,757.4) ÷ $2,757.4]. Cash decreased modestly by the end of the year.
(b) Starbucks appears to be in the stronger cash position based on its ability to generate sufficient cash flow from operations to cover the uses of cash from investing and financing activities, concluding with a small reduction of cash for the year.