discuss the relationship between net income and cash flow from operations and the re 599625
Preparing and analyzing a statement of cash flows
Allen Company produces roofing supplies and insulation materials for use in home and commercial construction. Although Allen has been growing, recent lack of production capacity has caused production delays, some stockouts of finished goods, and a shift in the inventory mix from finished goods to raw materials and work in process. Allen Company’s comparative balance sheet data and additional information follow (note that 2012 is the year listed first in the presentation):
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Allen Company comparative balance sheet |
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2012 |
2011 |
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|
Assets |
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Cash |
$108,000 |
$60,000 |
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Accounts receivable, net |
320,000 |
235,000 |
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Inventory |
450,000 |
510,000 |
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Prepaid expenses |
27,000 |
30,000 |
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Total current assets |
905,000 |
835,000 |
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Investments in affiliates |
200,000 |
100,000 |
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Property, plant, and equipment |
1,100,000 |
950,000 |
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Less accumulated depreciation |
(440,000) |
(370,000) |
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Intangible assets |
35,000 |
45,000 |
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Total assets |
$1,800,000 |
$1,560,000 |
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Liabilities and shareholders equity |
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Accounts payable |
$554,000 |
$400,000 |
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Accrued liabilities |
36,000 |
38,000 |
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Total current liabilities |
590,000 |
438,000 |
|
Long-term notes payable |
380,000 |
100,000 |
|
Contributed capital |
710,000 |
750,000 |
|
Retained earnings |
120,000 |
272,000 |
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Total liabilities and shareholders equity |
$1,800,000 |
$1,560,000 |
The following additional information is available:
- The company’s stock has no par or stated value. Contributed capital is shown as one amount (i.e., no distinction between common stock and capital in excess of par).
- Net loss for the year was $110 000.
- The intangible assets have limited lives and were amortized by $10 000 during the year.
- Investment in affiliates represents equity method investments. The income statement reported $80 000 income from equity method investments. $10 000 dividends were received from affiliates. Remaining changes in the account relate to additional investments.
- Less efficient equipment with an original cost of $200 000 was sold during the year for $40 000. The accumulated depreciation on that equipment was $130 000.
- Cash dividends of $12 000 were declared and paid during the year. The company also declared and distributed a $30 000 stock dividend during the year.
- The company repurchased the stock of a dissident shareholder during the year and retired the shares. The company paid $70 000 (which was the original issue price of the shares).
- No long-term notes were retired during the year.
Required
(a) Prepare a statement of cash flows for 2012.
(b) Discuss the relationship between net income and cash flow from operations and the relationship among cash flow from operating, investing, and financing activities during the two years. Be as specific as the data allow.
(c) Identify two conditions in the operating section of the statement which point to the possibility that cash flow from operations might decline next year.