Acme Packets Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

What are the main reasons why their cash flows from operations are higher than net income? Is this sustainable?

The operating cash flows of Acme Packet are $22 million, whereas the net loss of the company is $404 million. The net difference in the losses and the cash flows are $426 million. The cash flow is higher with the amount of $426 due to the change in accrued expenses. The accrued expenses have increased from $140 million to $858 million and giving a net impact on the cash increase of $718.

The transaction number 12 has increased the accrued expenses by the amount of $900 million that relates to the research and development expenditure on account of another company indicates that Acme Packet has to pay off this amount to that company in near future.

The amount relates to the expenditure, therefore the payable is said to be the accrual expenditure. The amount does not seem to be sustainable because the company may not go for such extensive research and development expenditure and no company can give credit facilities to Acme year on year basis.

Provide a likely and economically sound reason why this company has both an extremely high Gross Margin and a negative Operating Margin.

The economic reason is that the direct costs of Acme are very low, but as the indirect costs (operations costs) are very high, therefore it has high gross profits and a negative operating profit (Operating loss).

The direct costs are also labor costs that are included in the operating cost in this case; however, it does not have a higher amount that can change the economical reason as defined above.

The operations related cost is very high in that the research and development cost is around $1650 million that is also a fixed cost. In US GAAP, the research and development costs must be expensed as incurred, therefore it has a major impact behind the negative operating profits.

The gross profit margin is around 85% for the year ended 31 December, 2015 and the operating profit margin is 25% negative. The operating loss is 25% of the revenues and the main reason is the direct cost of that research and development cost has put a greater impact to have negative income.

Why do we add back a decrease to Accounts Receivable?

The decrease in account receivable shows that the net cash has increased due to decrease account receivables. Acme has received higher cash than the sales figure due to unpaid balance of receiving that relates to the last year balance (2014).

In this case, the receivable balance has decreased to $575 million in 2015 from $600 million from 2014. The net decline is $25 million that is extra cash it has received from its customers as compared to the revenues for the year 2015.

What is the Net effect of Depreciation on Cash Flows?

The depreciation is the contra account of the property, plant and equipment. The property, plant and equipment cost is reduced by the accumulated depreciation amount to get the net property plan and equipment value for the year. The depreciation expenditure for the year ended 2015 is $41 million.Acme Packets Case Solution

Depreciation is the systematic allocation of the cost of the fixed assets over its useful life. The depreciation is the expense for the income statement, but it has nothing to do with the cash. The expense is a non-cash expense; therefore it must be added back while calculating the operating cash flows for the year.

The depreciation reduces the net value of the property, plant and equipment, therefore it does not require any cash movement this is why it has nothing to do with the cash position and it does not affect the cash flows of any entity...............

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