The O’Toole Company has the following balance sheet data (in millions):

Net income for 20X2 was $60 million. Net cash inflow from operating activities was $72 million. Cash dividends paid were $10 million. Depreciation was $20 million. Fixed assets were purchased for $195 million, $120 million of which was financed via the issuance of long-term debt, the balance outright for cash. Sean O’Toole, Jr., the president and majority stockholder of O’Toole Company, was a superb operating executive. He was imaginative and aggressive in marketing and ingenious and creative in production. But he had little patience with financial matters. After examining the most recent balance sheet and income statement, he muttered, “We’ve enjoyed 10 years of steady growth; 20X2 was our most profitable ever. Despite such profitability, we’re in the worst cash position in our history. Just look at 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.”
1. Prepare a statement of cash flows using the indirect method, which includes a schedule reconciling net income to net cash provided by operating activities in the body of the statement.
2. Using the statement of cash flows and other information, write a short memorandum to Mr. O’Toole, explaining why there is such a squeeze oncash.

  • CreatedNovember 19, 2014
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