The Feinstein Company has assembled the accompanying balance sheets and statement of income and retained earnings for 20X4.

Feinstein Company

Balance Sheets as of December 31 (in millions)

Feinstein Company
Statement of Income and Retained Earnings for the Year Ended
December 31, 20X4 (in millions)

On December 30, 20X4, Feinstein paid $103 million in cash to acquire a new plant to expand operations. This was partly financed by an issue of long-term debt for $54 million in cash. Plant assets were sold for their book value of $6 million during 20X4. Because net income was $16 million, the highest in the company’s history, Isaac Feinstein, the chief executive officer, was distressed by the company’s extremely low cash balance.
1. Prepare a statement of cash flows for 20X4 using the direct method for reporting cash flows from operating activities.
2. Prepare a schedule that reconciles net income to net cash provided by operating activities.
3. What is revealed by the statement of cash flows? Does it help you reduce Mr. Feinstein’s distress? Why? Briefly explain to Mr. Feinstein why cash has decreased even though net income was $16 million.

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20X4 20X3 Change Assets $ 4 22 31 50 3 207 150 $337 $256 Cash Accounts receivable Inventory Prepaid general expenses Plant assets, net 52 70 4 $(18) 21 20 57 81 Liabilities and shareholders' equity $74 $ 60 14 Accounts payable for merchandise Accrued tax payable Long-term debt Capital stock Retained earnings 2 54 100 94 $337 $256 54 100 106 12 81 Sales $282 Less: Cost of goods sold Inventory, December 31, 20X3 Purchases Cost of goods available for sale Inventory, December 31, 20X4 $ 50 185 235 70 165 Gross profit Less: Other expenses General expense Depreciation Taxes 51 40 10 Net income Dividends declared and pald Net income of the period retained Retained earnings, December 31, 20x3 Retained earnings, December 31, 20X4 101 16 4 12 94 $106