The following financial statements from SOS Staffing Services, Inc. were downloaded from the SEC’s EDGAR database:

190 CHAPTER 5 Writing SOS STAFFING SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended December 28, 1997, December 29, 1996 and December 31, 1995 Increase (Decrease) in Cash and Cash Equivalents Fiscal Year (52 Weeks) Ended

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1997 1996 1995

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CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $7,526,227 $4,029,160 $2,939,942 Adjustments to reconcile net income to net cash used in operating activities:

Depreciation and amortization 2,156,882 854,902 374,114 Deferred income taxes (596,604) (825,941) 274,352 Loss on disposition of assets 26,927 63,030 3,554 Changes in operating assets and liabilities:

Accounts receivable, net (12,448,572) (8,785,524) (10,740,788)

Workers’ compensation deposit 134,924 (6,021) 1,277,178 Prepaid expenses and other (288,556) (127,943) (128,033)

Amounts due from related parties (17,521) 54,521 (445,881)

Deposits and other assets (312,348) (84,969) 7,667 Accounts payable 371,271 391,177 29,742 Accrued payroll costs 1,456,305 529,247 685,683 Workers’ compensation reserve 1,196,488 957,338 (35,989)

Accrued liabilities (624,956) 219,439 57,650 Income taxes payable 479,885 301,961 74,576

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Net cash used in operating activities (939,648) (2,429,623) (5,626,233)

Required

a. Contrast SOS’s positive net income with its negative CFOA.

b. Draw a simple graph showing the trends in net income and CFOA. Evaluate these trends.

c. From the data above, what is the primary reason for SOS’s negative CFOA?

d. Use balance sheet data to verify or confirm your answer from part (c).Explain why these data are confirmatory.

e. Calculate the following ratios, for each year:
1. cash return on assets (1997 and 1996 only)
2. quality of income 3. cash interest coverage

f. Based on these ratios, evaluate SOS’s performance each year. In what areas, do the cash flow ratios indicate positive or negative performances?
g. What additional information would be useful in evaluating SOS’s performance?