Charatlal, the president and majority shareholder, was a superb operating executive. He was an imaginative, aggressive marketing man and an ingenious, creative production man. But he had little...

Charatlal, the president and majority shareholder, was a superb operating executive. He was an imaginative, aggressive marketing man and an ingenious, creative production man. But he had little patience with financial matters. After examining the most recent balance sheet and income statement, he muttered, “We have enjoyed ten years of steady growth, this year was our most profitable year. Despite this, we are in the worst cash position in our history. Just look those current liabilities in relation to our available cash! This whole picture of the more you make, the poorer you get, just does not make sense. These statements must be cockeyed.”

The balance sheets (in lakh of rupees) of Charat Engineering Ltd. are given below:

Net income before taxes, `81 lakh. Taxes paid are `27 lakh. Net income was `54 lakh. Cash dividend paid were `7 lakh. Depreciation was `20 lakh. Fixed assets were purchase for `220 lakh, `150 lakh of which was financed via the issuance of long-term debt outright for cash.

Using cash flow statement (based on AS-3), write a short memorandum to Mr Charatlal, explaining why there is such squeeze for cash. Show working.