CASE STUDY: INTERPRETING DEBT DISCLOSURES ASSIGNMENT
Lisa Borgese
School of Business, Liberty University
BUSI 532 Advanced Financial Statement Analysis
Dr. Debra Touhey
July 30th, 2023
Introduction
In this case, Lucky Lady Inc, represents a hypothetical company that one can see
similarities between their financial statements and with financial statements that are derived
from companies. As an analyst, one understands that the statement of cash flows can be a
strong indication of a company’s financial health. Companies that understand and can manage
their cash flows are more likely to attract potential investors. That is why it is vital for analysts
and investors alike, to be able to read and interpret cash flow statements of companies. Given
the disclosed information and the construction of the statement of cash flows in this case, one
can see that the Lucky Lady, Inc., has negative cash flow and thus is not a good financial
standing.
According to Revsine, “the indirect method of structuring the statement of cash flows
begins with the accrual basis net income and adjusts based on several statement items which
are both included and excluded from that accrual-based income.” (Revsine, 2020) This could
specifically include items such as noncash revenues and expenses, like cash inflows and
outflows, which are transacted but not recognized. The Generally Accepted Accounting
Principles (GAAP) encourages analysts and accountants to utilize the direct method; however,
the indirect method is primarily favored with many public companies. In the case of Lucky
Lady, Inc., a statement of cash flows was created using the indirect method, see Appendix C.
As one knows, there are many statement items that will not influence operating cash
flow and therefore they will need to be reversed to find the true cash flow from operating
activities. These include depreciation, stock-based compensation, deferred income, gains on
sale of property/equipment, change in inventories, net change in receivables, etc., many in
which are applicable in the Lucky Lady Inc., case. (Revsine, 2020)
Let’s first look at the operating activities on the statement of cash flows for Lucky Lady
Inc. Operating activities are activities which a business takes to produce a net income. (Revsine,
2020) Looking at the net income, one can notice that Lucky Lady incurred a net loss of $117,586
for year-end 20X1, see Appendix A for more details. In addition, there are cash flow sensitive
activities that will impact Lucky Lady’s operating activities such as an increase in accounts
receivable, increases in prepaid expenses, increases in inventory, decreases in preopening
expenses, increases in other operating assets, increases in accounts payable, increases in
accrued interest, increases in accrued salaries, increases in accrued liabilities, and increases in
deferred revenue, see Appendix B for more details. Although Lucky Lady had cash outflows
from operating activities of -$34,831, they failed to generate a positive income during that year
because their expenses were twice as much as their revenues, hopefully the company can make
some adjustments in the future to try to generate more income.
Next, one can evaluated the investing activities, in the statement of cash flows for Lucky
Lady Inc. As one knows, investing activities are actions a corporation takes to invest in longterm
assets. (Revsine, 2020) In this case, Lucky Lady had both a sale and a purchase of property,
plant, and equipment (PPE), along with an increase in construction payable. Combined, Lucky
Lady’s total investing activities totaled -$414,822. As one can notice, Lucky Lady is heavily
invested in long-term assets, which could help with income-bearing growth for the company.
Moving onto the financing activities in the statement of cash flows for Lucky Lady, Inc.
Financing activities are actions of a business where they attempt to raise capital from debt or
equity, which can also represent the company paying down debts. (Revsine, 2020) In this
scenario, Lucky Lady had a finance lease payment, and then issued common stock, which
resulted in a cash inflow of $80,995 from financing activities. The capital that was acquired
from the debt and stock issuance will hopefully sustain a positive net income for Lucky Lady.
As one analyzes the information provided on the statement of cash flows, one notices
that Lucky Lady experienced a cash outflow of -$34,831 in operating activities, a cash outflow of
-$414,822 in investing activities, and a cash inflow of $80,995 in financing activities. With all
these totals combined, Lucky Lady sustain a negative cash flow of -$368,658.00, hence this is a
net loss and therefore Lucky Lady would deem to be a risky investment opportunity for an
investor. Further, one can notice an increase in Lucky Lady’s receivables during the year, which
would indicate that the company has poor cash flow management. “Companies should strive to
receive payments on their receivables as soon as possible, and pay their payables as late as
possible, without breaching their obligations or sacrificing their business relationships with their
vendors.” (Revsine, 2020) Based on the information provided in the statement of cash flows for
Lucky Lady, Inc., this company would not be a good company for investors to invest in at this
present moment.
“Let your eyes look directly forward, and your gaze be straight before you. Ponder the
path of your feet; then all your ways will be sure.” (Proverbs 4:25-26, ESV)
References
English Standard Version Bible. (2016). Retrieved from
https://www.biblegateway.com/passage/?search=Proverbs%204:25-27&version=ESV
Revsine, L. (2020). Financial Reporting and Analysis (8th ed.). McGraw-Hill Higher Education
(US). https://bookshelf.vitalsource.com/books/9781264097005
Appendices
Appendix A
Lucky Lady, Inc.
Income Statement (in thousands)
For year end December 31, 20X1
Revenue
Casinos
26,702.00
Rooms
2,897.00
Food and Beverage
2,351.00
Other hotel/casino
5,066.00
Airline
20,784.00
Total Revenue
57,800.00
Operating Expenses
Casino 9341
Rooms
1,016.00
Food and Beverages
2,529.00
Other hotel/casino
5,777.00
Airline
20,599.00
Selling, general, administrative (Bad debt $3,855)
19,679.00
Depreciation Expense
8,018.00
Hotel preopening expense
45,130.00
Aircraft carrying value adjustment
68,948.00
Total Operating Expenses
181,037.00
Operating Income
(123,237.00)
Non-operating items
Interest Income
12,231.00
Interest expense
(6,596.00)
Other, net
16.00
Income before taxes
(117,586.00)
Provisions for income tax -
Net Income/Loss
(117,586.00)
Appendix B
Lucky Lady, Inc.
Balance Sheet (in thousands)
For year end December 31, 20X1
20X1 20X0
Assets
Cash
211,305.00
579,963.00
Gross Accounts Receivable
35,249.00
2,178.00
Less: allowance for doubtful accounts
(4,733.00)
(1,531.00)
Prepaid expenses
11,755.00
1,219.00
Inventories
12,662.00
154.00
Total Current Assets
266,238.00 581,983.00
Gross Property, Plant and Equipment
953,796.00
471,506.00
Less: accumulated depreciation
(86,512.00)
(21,796.00)
Pre-opening expenses -
10,677.00
Other operating assets
26,601.00
21,116.00
Total Assets
1,160,123.00
1,063,486.00
Liabilities and Owners Equity
Acccounts Payable
14,181.00
4,322.00
Accrued Salaries and wages
8,194.00
945.00
Accrued interest on long-term debt
9,472.00
9,429.00
Other accrued liabilities
33,502.00
9,744.00
Constructions payables
96,844.00
32,296.00
Current maturities, finance leases
1,830.00
289.00
Current maturities, long-term debt
1,573.00
-
Total Current Liabilities
165,596.00
57,025.00
Deferred revenue
10,784.00
-
Deferred income taxes
6,517.00
6,517.00
Long-term obligations, finance leases
14,044.00
162.00
Long-term debt
481,427.00
473,000.00
Total Liabilities
678,368.00
536,704.00
Common Stock
506.00
485.00
Capital in excess of par value
662,365.00 589,827.00
Common Stock in treasury
(29,490.00)
(29,490.00)
Retain earnings/deficit
(151,626.00)
(34,040.00)
Total Stockholders' Equity
481,755.00
526,782.00
Total Liabilities and Equity
1,160,123.00
1,063,486.00
Appendix C
Lucky Lady, Inc.
Balance Sheet (in thousands)
For year end December 31, 20X1
Beginning Cash
579,963.00
Net Loss
(117,586.00)
Depreciation
8,018.00
Aircraft carrying Value Adjustment
68,948.00
Loss on Sale of Property, Plant and Equipment
1,817.00
Change in A/R
(29,869.00)
Change in Prepaid expenses
(10,536.00)
Change in Inventory
(12,508.00)
Change in preopening cost
10,677.00
Change in Other Operating Assets
(5,485.00)
Change in A/P
9,859.00
Change in Accrued Wages
7,249.00
Change in Accrued Interest
43.00
Change in accrued Liabilities
23,758.00
Change in Deferred Revenue
10,784.00
Cashflow from Operating Activities
(34,831.00)
Sale of Property, Plant and Equipment
684.00
Purchase of Property, Plant and Equipment
(480,054.00)
Change in Construction payable
64,548.00
Cashflow from Investing Activities
(414,822.00)
Repayment of Capital Lease Principal
(1,564.00)
Debt Proceeds
10,000.00
Issuance of Common Stock
72,559.00
Cashflow from Financing Activities
80,995.00
Ending Cash
211,305.00
Difference in Cash
(368,658.00)
Net CashFlow for Year 20X1 (Cash Overflow)
(368,658.00)
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