At the beginning of 2011, Mary Abrahams purchased a small business, the Maitz Company, whose income statement and balance sheets are shown below.
Income Statement for the Maitz Company for 2011
Sales.....................................................$175,000
Cost of goods sold................................... (105,000)
Gross profits............................................$ 70,000
Operating expenses:
Depreciation..............................................$ 5,000
Administrative expenses.................................20,000
Selling expenses..........................................26,000
Total operating expenses............................$(51,000)
Operating profits.......................................$ 19,000
Interest expense.......................................... (3,000)
Profits before taxes.....................................$ 16,000
Taxes .......................................................(8,000)
Net profits................................................. 8,000
Balance Sheets for the Maitz Company for 2010 and 2011

Assets 2010 2011
Current assets:

The firm has been profit table, but Abrahams has been disappointed by the lack of cash flows. She had hoped to have about $10,000 a year available for personal living expenses. However, there never seems to be much cash available for purposes other than business needs. Abrahams has asked you to examine the financial statements and explain why, although they show profit, she does not have any discretionary cash for personal needs. She observed, "I thought that I could take the profit and add back depreciation to find out how much cash I was generating. However, that doesn't seem to be the case. What's happening?"
1. Given the information provided by the financial statements, what would you tell Abrahams?
2. How would you describe the cash flow?

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Assets 2010 2011 Current assets: S 8,000 S 10,000 Cash Accounts receivable 20,000 15,000 22,000 Inventory 25,000 S 55,000 Total current assets $45,000 Fixed assets: S 55,000 Gross fixed assets $50,000 Accumulated depreciation (15,000) (20,000) S 35,000 Net fixed assets $35,000 Other assets 12,000 10,000 $92,000 $100,000 TOTAL ASSETS Current debt: Accounts payable s10,000 S 12,000 Accruals 7,000 8,000 Short-tem notes 5,000 5,000 Total current debt $22,000 $ 25,000 Long-term debt 15,000 S15,000 Total debt $37,000 $ 40,000 Equity $55,000 $ 60,000 TOTAL DEBT AND EQUITY $92,000 $100,000