Prime Contractors (Prime) is a privately owned company that contracts with the U.S. government to...

Question

Prime Contractors (Prime) is a privately owned company that contracts with the U.S. government to provide various services under multiyear (usually five-year) contracts. Its principal services are as follows:
Refuse: Picks up and disposes of refuse from military bases.
Shuttle: Provides parking and shuttle services on government-sponsored research campuses.
Animal Care: Provides feeding and veterinary care for animals used in research at government-sponsored facilities.

Required
a. What evidence do you see in Exhibit 3.37 of Prime’s strategic shift from refuse services to animal care services?
b. Discuss how Prime’s net income could decline between Year 6 and Year 8 while its cash flow from operations increased.
c. Discuss how Prime’s net income could increase between Year 8 and Year 10 while its cash flow from operations decreased.
d. What is the likely reason that the adjustment for deferred income taxes when converting net income to cash flow from operations was an addition in Year 6 to Year 8 but a subtraction in Year 9 and Year 10?
e. Explain why gains on the disposition of fixed assets appear as a subtraction from net income when cash flow from operations is computed.
f. Prime increased its long-term debt net in Year 6 and Year 7 but decreased it net in Year 8 to Year 10. What is the likely reason for this shift in financing?

David · Accepted Answer

Answer a.  
The sales mix data proves the strategic shift of the business from Refuse Services to the 
Animal Care Services. The sales percentage of Animal Care Services increased from 0% in 
year 6 to 70.4% in year 10. Consequently Sales percentage from Refuse Services decreased 
from 59.9% in Year 6 to 7.1% in Year 10. 
Exhibit 3.37 shows the Cash Flow Statement of Prime Contractors from Year 6 to Year 10. 
When observed carefully, the strategic shift from the refuse services to Animal Care Service 
could be seen by high outflows on account of investment in Fixed Assets. The Cash Outflows 
in Year 6 and Year 7 on account of Investing Activities (in fixed assets) is $2,003 and $911. 
Generally such investment in Fixed Assets is on account of strategic move to enter into new 
business venture done by companies. The Fixed Assets investment in Prime Contractors has 
been funded by Long and Short Term borrowings. It is clearly depicted by Increase in 
Investment activities through long and short term financing that the Prime Contractors is into 
a major business shift.
Answer b. 
Although Prime’s Net Income for the period Year 6 was $ 261 and for the period Year 8 was 
only $47, still the Cash Flow from operations for the year 6 was only $64, while for the year 
8 was $964. The Cash Flows from operations and the Net Income are typically different from 
each other. The cash flows increased from Year 6 in Year 8 due to different reasons including 
Increased Depreciation,

Prime Contractors (Prime) is a privately owned company that contracts with the U.S. government to provide various services under multiyear (usually five-year) contracts. Its principal services are as...

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