Discussion files – Accounting Intake 52

<span class='text_page_counter'>(1)</span><div class='page_container' data-page=1>

Module 4

<b>Lancaster Corporation </b>

Lancaster Corporation is assessing its three-year plan on plant modernization and expansion. The
company is in a capital – intensive industry where plant and equipment can become obsolete in a few
years. This plan is as follows:

2011 Modernization by replacing obsolete equipment.

2012 Commencing the expansion by constructing a new plant and by purchasing equipment,
financed partly by selling the remaining long-term investments of $32 million.

2013 Completing the expansion and starting the operating of the new plant at the beginning of
2014. Of the total cost of $190 million incurred in 2014 ($52 million for plant and $ 138
million for equipment), $170 million will be financed equally by issuing bonds payable and
capital stock.

To enhance the attractiveness of its capital stock issue, the company wants to continue its
long-established dividend policy of about 8% on capital, which will require a cash dividend of $38 million
in 2014. Also, the company will have more than half of its assets financed by debts after issuing the
bonds payable in 2013. The new and old bond indentures (bonds were also issued prior to 2011) will
require the company to maintain a minimum cash balance of $30 million for 2014 and subsequent
years. It is expected that the net income for 2014 will be similar to that for 2013.

The comparative statements of changes in financial position for 2012 and 2013 are presented below.
LANCASTER CORPORATION

Comparative Statements of Cash Flows
For 2012 and 2013

(in millions of dollars)

2013 2012

Operating activities:

Net Income 12 16

Add: Expenses not requiring the use of cash – Depreciation 8 6

Decrease in accounts receivable 5 2

Decrease in inventories 2 2

Increase in account payable 10 3

Increase in accrued liabilities 2 1

Cash provided by operating activities 39 30

Investing activities:

Sale of long-term investments 32 62

Construction of plant (90)

Purchase of equipment (36) (60)

Cash used in investing activities (94) 2

Financing activities:

Issuance of bonds payable 116

Cash dividends (30) (30)

Cash provided by financing activities 86 (30)

Increase in cash 31 2

Cash Balance 41 10

<b>Instructions </b>

 Assess the company’s liquidity position for 2013.

 Comment on the company’s cash policies on operating, financing, and investing activities in
2013.

</div>

<!--links-->