As a junior analyst, you are evaluating the financial performance of Digilog Corp. Impressed by this year's growth in sales (20% increase), receivables (40% increase), and inventories (50% increase), you plan to report a favorable evaluation of the company. Your supervisor cautions that those increases may signal difficulties rather than successes. When you ask what she means, she just says you should look at the company's statement of cash flows.

2. What will you find in the company's statement of cash flows?

3. What are the cash flow effects when the balances in a company's receivables and inventory increase faster than its sales?