“Why can’t we pay our shareholders a dividend?” shouted your new boss. “This income statement you prepared for me says we earned $5 million in our first half-year!” You were hired last month as the chief accountant for Enigma Corporation, which was organized on July 1 of the year just ended. You recently prepared the financial statements below.

You just explained to your boss, Robert James, that although net income was $5 million, operating activities produced a net decrease in cash. Unable to understand your verbal explanation, he asked you to prepare a written report explaining the apparent discrepancy between Enigma’s profitability and its cash flows. To increase the chances of your boss’s understanding the situation, you want to include in your report a determination of net cash flows from operating activities demonstrating how it is possible for operating activities to simultaneously produce a positive net income and negative net cash flows.

Required:
Determine net cash flows from operating activities by both the direct and indirect methods.

ENIGMA CORPORATION Income Statement For the Six Months Ended December 31, 2024 ($ in millions) Sales revenue Cost of goods sold Depreciation expense Remaining expenses Net income ENIGMA CORPORATION Balance Sheet Cash Accounts receivable (net) Merchandise inventory Equipment (net) Total Accounts payable Accrued liabilities Notes payable Common stock Retained earnings Total December 31, 2024 ($ in millions) $75 (30) (5) (35) $5 $1 254 20 15 44 $80 $2 7 36 30 5 $80