Accounting - Company Profile, Cash Flows

Accounting -- Company Profile, Cash Flows (ABC Company)
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Introduction
ABC Company is manufacturing roofing materials and is now in the process of using shingle scrap materials in the creation of cedar dollhouses. The management makes a decision on the viability of this option based on the cost analysis. Focusing on the variable costs shows the impact of changes in the output level on the overall costs. The raw materials are time intensive and are also an important component of the inventory. However, the company is also affected by the external factors including the macroeconomic factors that affect the real estate market and the roofing contractors industry. ABC should be able to meet the financial obligations as they fall due, and the cash flow analysis shows the sources and uses of cash flow this makes it easier for the management to determine whether to change the divided policy can easily be changed unlike the other factors affecting the cash statement. The viability of the project is also evaluated by taking into account the NPV capital budgeting technique. The NPV is one such approach that helps to determine the future cash flows and resulting present value based on a specified rate of return. This paper assesses the viability of investing in an expansion project while also conducting a risk analysis on ABC Company, cost analysis and cash flow statement analysis
1] Risk profile
The manufacture of cedar roofing and siding shingles is affected by the construction projects since a rise in demand for ABC’s products results in higher sales. The housing market has largely rebounded since the 2008/2009 financial crisis. There is no dominant market payer manufacturing cedar roofing and siding shingles while the industry outlook is positive (First Research, 2009). Construction activities in the residential markets have a more profound impact on the performance of the company, and involvement in constructing dollhouses is not a risky venture. There is likely to be positive growth in the construction industry with increase in housing investment and higher consumer spending. Recovery of the housing market will impact positively on the performance of the roofing industry.
The roofing industry is fragmented, and since there are no economies of scale, handling large projects is beneficial to a company (First Research, 2009). Competition is mainly based on price, and since roofs require regular maintenance, there is ready work even when there are no new construction projects. Roofing and repairs are involved for the complete projects, they are profitable, but ABS also focuses on new projects to increase sales revenue. Cash flows vary considerably in the industry since there is less construction work during the winter seasons. Consumer spending on residential and no residential housing indicates the viability of the roofing sector in the U.S. Economic stimulus programs to boost house renovations are beneficial, but there is also increasing imports of roofing and siding components especially from Canada. With the fall oil prices the material costs are also considerably less.
The main clients of ABC may change their preference to other company’s products, but with proper branding, the company will likely attract and retain customers. To achieve this, there is a need to take into account the demographic profile of the major market segment. People have different preference for buying the dollhouse, highlighting the need to undertake a market analysis and reach out to the primary market. Other than these are the likely risk form added costs of manufacturing the new products as the company becomes less competitive. As such, the external factors affecting the construction industry and the roofing sub segment should not be ignored when making decisions that affect the company’s competitiveness.
2] Cash flow statement analysis
The cash flow statement is a useful tool to analyze the funds flow information and includes the operating activities, investing activities and financial indicators of liquidity. The cash flow statement is important to the creditors and investors who desire to asses the entity’s ability to generate future positive cash flows (Carslaw & Mills, 1991). An enterprise must also be able to meet financial obligations including dividend payments. The statement also provides more information that causes the net income to different form the cash receipts and payments (Carslaw & Mills, 1991). The other use of the cash flow statement is to provide information on how the cash and non cash items affect the financial position of an entity through financing and investing activities (Carslaw & Mills, 1991).
Organizations accelerate their cash flows with the aim of making it easier to spend the cash whi...