Active Corporation markets sports fashions and equipment primarily to young adults through sports retailers. In 2010, it attempted to expand its market by buying a retail chain of sports stores. The comparative statements of cash flows for 2010 and 2011 for Active Corporation follow.

REQUIRED

Evaluate the success of the company’s strategy by answering the questions that follow.

1. What are the primary reasons cash flows from operating activities differ from net income? What is the effect on the acquisition in 2010? What conclusions can you draw from the changes in 2011?

2. Compute free cash flow for both years. What was the total cost of the acquisition? Is the company able to finance expansion in 2010 by generating internal cash flow?

What was the situation in 2011?

3. What are the most significant financing activities in 2010? How did the company finance the acquisition? Do you think this is a good strategy? What other issues might you question in financing activities?

4. Based on results in 2011, what actions was the company forced to take, and what is your overall assessment of the company’s diversification strategy?

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Active Corporation Statement of Cash Flows For the Years Ended December 31,2011 and 2010 (In thousands) 2011 2010 Cash flows from operating activities Net income (loss) Adjustments to reconcile net income to net cash flows from operating activities (21,545) S 38,015 35,219 35,000 25,018 Depreclation Loss on closure of retail outlets Changes In current assets and current liabilitles Decrease (increase) in accounts receivable Decrease (increase) in inventory Decrease (inc Increase (decrease) in accounts payabl Increase (decrease) in accrued liabilties Increase (decrease) in income taxes payable 50,000 60,407 1,367 30,579 1,500 (8,300) 205,772 $184,227 (44803) (51,145) 2,246 1,266 (2,788) (6,281) (76,487) (38472) rease) in prepaid expenses Net cash flows from operating activitles Cash flows from investing activities Capital expenditures, net (16,145) Purchase of Retail Divilsion, cash portion Net cash flows from investing activitles Cash flows from financing activities S (33,112) (201000) $(234,112) s (16,145) $(123,500) 9,238) (22,924) $228,400 (10,811) (19,973) (12,500) 185,116 $ (87468) 103,500 s 16,032 Increase (decrease) in notes payable to banks Reduction in long-term debt Payment of dividends Purchase of treasury stock Net cash flows from financing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year $155,662) $ 12,420 $ 28,452 Schedule of Noncash Investing and Financing Transactions Issue of bonds payable for retail acquisition 5 50,000