Question

Why can’t we pay our shareholders a dividend? Shouts your new boss at Polar Opposites, “This income statement you prepared for me says we earned $5 million in our first year!” You recently prepared the financial statements below.
POLAR OPPOSITES
Income Statement
For the year ended December 31, 2015
($ in millions)
Net sales ............... $65
Cost of goods sold ........... (35)
Depreciation expense ............ (4)
Operating expenses ............ (21)
Net income ................ $ 5
POLAR OPPOSITES
Balance Sheet
December 31, 2015
($ in millions)
Cash ................. $ 1
Accounts receivable (net) ........ 16
Merchandise inventory ......... 14
Machinery (net) .............. 44
Total assets .............. $75
Accounts payable ........... $ 7
Accrued expenses payable ......... 9
Notes payable ............. 29
Common stock ............ 25
Retained earnings ........... 5
Total liabilities and stockholders’ equity .. $75
Although net income was $5 million, cash flow from operating activities was a negative $5 million. This just didn’t make any sense to your boss.

Required:
Prepare a memo explaining how net income could be positive and operating cash flows negative. Include in your report a determination of operating cash flows of negative $5 million using the indirect method.



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  • CreatedJuly 15, 2014
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