Jim Shea is an accountant at King and Associates, which is an accounting firm based in Halifax, Nova Scotia. The firm specializes in dealing with small business clients who generally are very successful business people but have limited accounting knowledge.
Owen Ridlow is a client and the sole owner of Ridlow Shipping. He recently called Jim with some questions about the financial statements prepared for the year ended December 31, 2011. During the conversation, Owen made the following comment: "Jim, I am wondering why I have to pay you guys to prepare a statement of cash flows. I understand the importance of the statement of financial position and the statement of earnings; but since I always know how much cash I have in the bank and I reconcile my bank accounts regularly, why do I need a statement of cash flows? It seems to me that paying to have this statement prepared is an unnecessary expense."
Required:
Do you think Owen is at all justified in making this comment? Outline several points that Jim should raise in his discussion with Owen to explain the importance of the statement of cash flows and justify the need for it. Support your answer by referring to Ridlow Shipping's most recent statement of cash flows, which follows.
RIDLOW SHIPPING LTD.
Statement of Cash Flows
As of December 31

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2011 2010 Operating activities: Net earnings $206,250 $254,500 items not representing cash flows: 40,000 6,000 Depreciation 50.000 Loss on sale of investments Adjustment for working capital items 2,000 Decrease (increase) in accounts receivable 40,000) 16,000 5,000) 2,000) 500 45,000 (28,000) 53.000 293,000 Increase in inventories Decrease in prepaid rent 750 Increase (decrease) in accounts payable Net cash provided by operating activities Financing activities: Repayment of bonds Issuance of shares Payment of dividends Net cash consumed by financing activities (100,000) 50,000 75,000) (75,000) (125,000 (75,000) Investing activities: Sale of investments Purchase of capital assets Net cash consumed by investing activities 20,000 215,000)197,000) 50,000 165.000) (177,000) Overall increase (decrease) in cash during year Cash balance at beginning of year Cash balance at end of year 37,000 41,000 9,000 13,000 50,000 50,000