(All numbers are in 000,000’s format)
Cash Flow Statement review comments:
After putting in my initial monthly projections and balancing my assumptions, I realized that CVS had no
projected marketable securities whatsoever, which I initially thought contributed to the fact that CVS did
not have any marketable securities on any of their prior balance sheets. After balancing the projections the
first time, the Bank Line of Credit lines had enormous amounts of money in the monthly accounts. I knew
that I needed an approximate 6% return on marketable securities, so I added a $2500 liabilities under
Other Advances/(Payments) and re-balanced my assumptions. After the re-balance, I achieved my desired
6% return on marketable securities.
Regarding surpluses and monthly cash requirements, the cash flow from operations and the net cash
income were very volatile. April through July both contained heavy cash outflows, where the beginning
of the year and post-July had substantial positive cash inflows. For the first half of the year, the Bank Line
of Credit has a decreasing amount of money in the account, but after August, the money is in a surplus
and is sent to marketable securities.
When could the firm invest surplus funds and for how long?
The Marketable Securities account starts in August and ends the year at a total of $8564. The firm
does not receive cash surplus funds during the summer months in this scenario. From January to
March, and from August to the end of the year, the cash flow statement says that the net cash
flow is positive. For about 2/3 of the year, cash can be invested into any type of investments they
want. During the summer months, however, CVS needs to sell off some of their investments to
cover their shortfall in cash.
In what type instruments should the firm invest its surplus funds?
The firm should invest their surplus in short-term investments such as Treasury Bills or short-
term Certificates of Deposits for a few reasons. First, these investments give the investor a great
deal of liquidity. In the summer months, when the cash inflow dips significantly, we will need to
sell some of these assets to cover the losses. Second, these investments allow the firm to switch
investments easily. Since the short-term investments are sold easily and can be transferred, the
risk of long-term holdings go out the window.
When is the firm required to borrow under short-term credit facilities and for how
In Scenario 1, the firm is required to borrow under short-term credit facilities from January to
July. Due to my assumptions, a Bank Line of Credit is necessary during this time to pay the
enormous amount of short term debt I predicted on the balance sheet. For example, at the
beginning of the year, there is a projected $40,134 worth of current liabilities. To pay for this
debt, we will require a substantial initial short-term credit facility.