Dax Corporation’s genetically engineered flowers have rapidly gained market acceptance and shipments to customers have increased dramatically. The company is preparing for significant increases in production. Management notes that despite increasing profits the cash balance has declined, and it is forced to nearly double its debt financing in the current year. You are hired to advise management as to specific causes of the cash deficiency and how to remedy the situation. You are given the following balance sheets of Dax Corporation for Years 1 and 2 ($ thousands):                        

DAX CORPORATION Balance Sheets December 31, Year 2 and Year 1
($ thousands)	Year 2		Year 1
Assets
Cash		$ 500		$ 640
Accounts receivable, net		860		550
Inventories		935		790
Prepaid expenses.		25		—
Total current assets		$2,320		$1,980
Patents	$ 140
Less accumulated amortization	(10)	130		—
Plant and equipment.	2,650		$1,950
Less accumulated depreciation	(600)	2,050	(510)	1,440
Other assets	200		175
Less accumulated depreciation	(30)	170	(25)	150
Total assets.		$4,670		$3,570
Liabilities and Equity
Accounts payable		$ 630		$ 600
Deferred income tax		57		45
Other current liabilities		85		78
Total current liabilities.		772		723
Long-term debt		1,650		850
Common stock, $1 par		2,000		1,800
Retained earnings		248		197
Total liabilities and equity		$4,670		$3,570

In addition, the following information is available:

1. Net income for Year 2 is $160,000 and for Year 1 it is $130,000.

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2. Cash dividends paid during Year 2 are $109,000 and during Year 1 they are $100,000.

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3. Depreciation expense charged to income during Year 2 is $95,000, and the provision for bad debts (expense) is $40,000. Operating expenses include cash payments of $28,000 in interest costs and $70,000 in income taxes.

4. During Year 2 the company purchases patents for $140,000 in cash. Amortization of patents during the year amounts to $10,000.

5. Deferred income tax for Year 2 amounts to $12,000 and for Year 1 it amounts to $15,000.

Required:

a. Prepare a statement of cash flows (indirect method) for Year 2.

b. Explain the discrepancy between net income and cash flows from operations.

c. Describe options available to management to remedy the cash deficiency.

Answer rating: 100% (QA)

Answer Statement of cash oos Daxi compoua4in Mecember 31 Ye... View the full answer