Q: I am going over the solutions for the first session. Can you tell me where the number highlighted ($83,527, on page 5) is coming from?
A: 1. Exhibits II and III show that the company needs $621,082 of either inside or outside financing to meet its debt service. Inside refers to loans or capital contributions from owners and / or related parties. Outside refers to loans or capital contribution from financial institutions or investors. Another possible source of cash would be existing cash balances on the balance sheet at the beginning of 2021, but that cash balance was only $51,422 - too small to be of much help as it turns out.
2. Exhibit III shows the company needs a further $269,953 to fund its fixed asset spending. The Exhibit also shows that it needs an additional $86,863 to pay for the subordinated debt repayment to the owner. Related Party cash flow drained that amount from the company.
3. $621,082 + $269,953 +$86,863 = $977,898 which is the Financing Required reported in Exhibit III.
Now assumptions come into play about how the company used the additional short and outside long term debt it arranged.
4. The company applied the amount of additional short term debt it did not need to pay for its debt service - $273,289 - to pay $86,863 of subordinated debt to the owner. Once this payment was made from additional short term debt, the company had $186,426 of remaining short term debt to apply to fixed asset spending. Since fixed asset spending was $269,953, the $186,426 payment needs to be supplemented by $83,527 of the $183,267 of new long term, outside debt arranged by the company to meet the full amount of fixed asset spending. The unused new long term debt of $183,267 - $83,527 = $99,740 goes into the company's cash account on its balance sheet and increases it by $99,740.
Why the company arranged more new long-term debt than it needed is unclear, but it could indicate the it had no clear idea of its cash position or cash needs at the time it made the term loan request. In addition, it may have acquired more fixed assets than it had initially planned as the year unfolded.
Long story, but I hope it helps. The assumption here that the company first took care of its owner and used the excess short term debt to pay down $86,863 of subordinated debt due to the owner is open to challenge, but I think it seems logical.
Course overview: UCA Cash Flow Statement, Traditional "Cash Flow," and EBITDA