Apply your critical-thinking ability to the knowledge youve gained. These cases will provide you with an opportunity

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Question:

Apply your critical-thinking ability to the knowledge you’ve gained. These cases will provide you with an opportunity to develop your research, analysis, judgment, and communication skills. You also will work with other students, integrate what you’ve learned, apply it in real-world situations, and consider its global and ethical ramifications. This practice will broaden your knowledge and further develop your decision-making abilities.

“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:

ENIGMA CORPORATION Income Statement For the Six Months Ended December 31, 2011 ($ in millions)

ENIGMA CORPORATION Balance Sheet December 31, 2011 ($ in millions)

You have 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 has asked you to prepare a written report.

Required:

Prepare a report explaining the apparent discrepancy between Enigma’s profitability and its cash flows. To increase the chances of your boss’s understanding the situation, include in your report a determination of net cash flows from operating activities by both the direct and indirect methods. Your report should also include a narrative explanation of how it is possible for operating activities to simultaneously produce a positive net income and negative net cash flows.