Minicase 2 Vermont Teddy Bear Co.}

Founded in the early 1980s, Vermont Teddy Bear Co. designs and manufactures American-made teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are personalized teddy bears delivered directly to the recipient for special occasions such as birthdays and anniversaries. The Shelburne, Vermont, company's primary markets are New York, Boston, and Chicago. Sales jumped dramatically in recent years, exceeding \(50 \%\) increases for several consecutive years prior to 1994. Such dramatic growth has significant implications for cash flows. Here are the company's cash flow statements for 1993 and 1994:

\section*{Instructions}

(a) Note that net income in 1994 was only \(\$ 17,523\) compared to 1993 income of \(\$ 838,955\), but cash flow from operations was \(\$ 236,480\) in 1994 and a negative \(\$ 700,957\) in 1993.
Explain the causes of this apparent paradox.

(b) Evaluate Vermont Teddy Bear's liquidity, solvency, and profitability for 1994 using cash flow-based ratios.

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VERMONT BEAR TM VERMONT TEDDY BEAR CO. Comparative Statement of Cash Flows For the Years Ended December 31 TEDDY Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Deferred income taxes Depreciation and amortization 1994 1993 $ 17,523 $ 838,955 (69,524) 316,416 (146,590) 181,348