Academic journal article Journal of the International Academy for Case Studies

Mixed Signals at Gabba Enterprises.(Instructor's Note)

Academic journal article Journal of the International Academy for Case Studies

Mixed Signals at Gabba Enterprises.(Instructor's Note)

Article excerpt

CASE DESCRIPTION

This case requires the student to understand how a statement of cash flows is related to and can be derived from a company's income statement and balance sheets. Students must produce a complete statement of cash flows using both the direct and indirect methods. The student must then interpret the results of the cash flow statement in light of other information provided in the case and the other financial statements in terms of its impact on the feasibility of financing a major expansion of a business enjoying tremendous growth and expecting continued success. The case has a difficulty level of four to five as it would be appropriate for either senior level or graduate level courses. The case is designed to be taught in two to three class hours and is expected to require three to four hours of outside preparation by students.

CASE SYNOPSIS

Gabba Enterprises began operations some ten years ago when its founder, Joey Mareno, an experienced and accomplished tool and die maker, decided to start his own business. The company has thrived ever since to the point where the company is planning to undertake a major expansion. Despite its previous successes, the company does not believe it can fund its future growth on its own so Joey has gone to his primary banker seeking the necessary financing. Providing the bank with balance sheet and income statement data along with his well thought out business plan for the future, he was surprised to discover that he also needed to produce a statement of cash flows to help document how the company would generate sufficient cash flows to repay the loan. Given information provided in the case the student is required to create a cash flow statement and then interpret the results. It provides a good review of basic accounting relationships and, more importantly, evidence of how cash flow statements provide important insights into a company's operations that cannot easily be seen from examining balance sheets and income statements alone.

INSTRUCTORS' NOTES

PEDAGOGY

The focus of the case is the creation of a statement of cash flows using both the direct and indirect methods of presenting the cash flow from operating activities. After producing the statement, the student must interpret the results, some of which appears to contradict the impressions they may have had about the company from initially reading through the case. The student must take the perspective of an analyst having to correctly develop a cash flow statement from scratch as well as having to explain the results. The case would be appropriate for senior-level and graduate students with sufficient accounting background to understand the interrelationships among accounts represented on the balance sheet, income statement and cash flow statement. The case is designed to be taught in two class hours and is expected to require two hours of outside preparation by students.

TEACHING PLAN

Class discussion should begin with a review of the various accounts summarized on a company's balance sheet and income statement, moving on to how the cash flow statement is needed to fully understand the financial situation within any reporting entity. Instructors may wish to structure the case discussions as follows:

1. Review the key accounts found on the balance sheet and the income statement.

2. Describe the need for a cash flow statement to help understand changes occurring with the firm that are not sufficiently provided by the balance sheet and income statement.

3. Review the three primary components of the cash flow statement, and describe the similarities and differences between presenting the cash flow from operating activities from both a direct and an indirect perspective.

4. Develop cash flow statements for the company from both direct and indirect perspectives.

5. Interpret the cash flow statement in terms of its affirmation or rejection of the situation presented by the borrowers to their bankers. …

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