Question

Metro Bus Company had $400,000 of revenue and $401,000 of expense (including depreciation) for the current year resulting in a $1,000 net loss. All revenues were received in cash. All expenses were paid in cash, except for depreciation of $181,000. At the end of the year, the Balance Sheet shows $225,000 of Cash and $1,775,000 of other assets. The Company has no debt and all of the busses are modern - there is no plan to purchase more busses. Although there is sufficient Retained Earnings and they historically have paid dividends of $25,000, Management has decided against paying a dividend to stockholders in the current year. Instead, they issue a statement to their stockholders, explaining that "with a $1,000 net loss, Management feels there is insufficient cash for the dividend." What is the Company's cash flow? What is the difference between cash flow and net income? Evaluate the accuracy of Management's statement: "with a $1,000 net loss, Management feels there is insufficient cash for the dividend." Evaluate the plan to skip the dividend. How would your response change if the stockholders were (a) common stockholders, (b) non-cumulative preferred, or (c) cumulative preferred?

Answer 1

cash flow Na Add'- Net loss Depreciation GIO00) $ 181,000 ad cash flow $189000 ! items as which are deprectation cash generated Cash flow considers only those cash items. Non Cash items such ete are excluded Cash flow represents amount of used by business activities on the other hand net income by business after considering all revenue & expenses or is cash income earned and non cash accurate, since there there is cufficient is fund Management statement is not tash balance of $225,000 to pay dividends Ilowever there is not loss some regulatory aspect which to pay dividende of may $1000 , there restrict the may be company company should not skip dividend i'll there is no regulatory restriction and because company has no plan of expending its business, therefore it's better to distribute the dividend.

Common Shareholders Company can skip dividend. Its totally upto Company to pay dividend or not. It is not meendatry to ray dividend to common shareholders Non. Cymulative preferred loss of $ 1000 company can since Skip there is net the dividend - Cumulative preferred Here selso company can this scenario dividend dividend and company whenever they report skip the will get will be profits. dividend, however in added to next years liable to pay