Accounting Reports Crabtree Enterprises was established as a sole proprietorship with an investment from its owner. Even though the owner does all of the work for the business and does not draw a salary, the business was expected to operate at a loss during the first two years. However, the business was able to complete its second year of operations with a small profit. During the second year, Crabtree purchased, at a cost of $90,000, inventory to sell to customers. It received $120,000 when the inventory was sold during the year. At the end of the year, Crabtree purchased for cash $75,000 of additional inventory to sell to customers, but that inventory was not sold during the year. Crabtree currently leases a building and all of its equipment. It made

$25,000 in lease payments for the year. Also during the year, Crabtree purchased for $50,000 cash a piece of land on which it hopes to build a new facility. To pay for the land, Crabtree had to borrow $15,000 from the bank.

a. Prepare an income statement for Crabtree for its second year of operations.

b. Prepare a statement that shows Crabtree’s cash inflows and cash outflows for the second year.

c. How can a company operate profitably for the year and yet have a negative cash flow (a net cash outflow)?

d. Do you think the company’s profit for the year or its negative cash flow is a better indicator of its potential success?
Explain.