Allou Health & Beauty Care, Inc. was a manufacturer and distributor of hair and skin care products. Exhibit 8 presents excerpts from the company’s financial statements from 2000 to 2002. Following the periods reported in these statements, Allou’s warehouses were destroyed by fire, for which the management was found to be responsible. Allou was subsequently shown to have fraudulently inflated the amount of its sales and inventories in those years.

*The difference between income from operations and income from continuing operations included deductions for interest expense and provision for income taxes in each year and for a $5,642,678 loss on impairment of investments in 2001.
Referring to Exhibit 8 , answer the following questions:
1. Based on the income statement data, evaluate Allou’s performance over the period shown.
2. Compare Allou’s income from continuing operations and cash flows from operating activities.
3. Interpret the amounts shown as adjustments to reconcile income from continuing operations to net cash used in operating activities.

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EXHIBIT 8 Illustration of Fraudulent Reporting in which Reported Net Income Significantly Exceeded Reported Operating Cash Flow, Annual Data 10-K for Allou Health & Beauty Care, Inc., and Subsidiaries Years ended 31 March Excerpt from Income Statement Revenues, net Costs of revenue Gross profit Income from operations Income from continuing operations* Excerpt from Statement of Cash Flows Cash flows from operating activities: Net income from continuing operations Adjustments to reconcile net income to net cash used in operating activities: [Portions omitted] Decrease (increase) in operating assets: Accounts receivable Inventories Net cash used in operating activities 2002 $564,151,260 $548,146,953 482,590,356 $65,556,597 500,890,588 $63,260,672 1 27,276,779 $6,589,658 2001 $6,589,658 I 28,490,063 1 $2,458,367 $2,458,367 1 2000 $421,046,773 367,963,675 $53,083,098 1 22,256,558 $7,043,548 $7,043,548 (24,076,150) (9,725,776) (25,691,508) (9,074,118) (12,644,519) (40,834,355) $(17,397,230) $(34,195,838) $(27,137,652)