As an accounting professional, you will be presenting and explaining accounting concepts to clients and to company management.

For this participation assignment, assume you work in corporate accounting, and your boss wants to know why the income statement you prepared shows $5 million in income for the year, but you have told him the company is unable to pay shareholders a dividend, because there is no cash available. You need to explain to the boss that, even though net income was $5 million, operating activities produced a decrease in net cash.

Prepare a memo to your boss explaining the discrepancy between accrual net income and cash flows from operating activities. Include a determination of net cash provided by operating activities to backup your statement. You may use the indirect method or the direct method. Use the financial statements below, and assume that all beginning balances on the balance sheet were zero. Follow the paragraph format provided below the financial statements.

VALLEY MERCHANDISING CORP

Income Statement

For the Year Ended 12-31-20

($ in millions)

Sales Revenue 75

Cost of goods sold (30)

Depreciation expense (5)

Remaining expenses (35)

Net Income 5

VALLEY MERCHANDISING CORP

Balance Sheet

As of 12-31-20

($ in millions)

Cash 1

Accounts receivable 20

Inventory 15

Property, Plant & Equipment 44

Total Assets 80

Accounts payable 2

Accrued current expenses payable 7

Long term notes payable 36

Common stock 30

Retained earnings 5

Total liabilities and Equity 80

Suggested Memo Format to Use (remember, you are writing a memo to your boss, and you are the accounting expert):

Paragraph 1: Write one sentence explaining that it is possible to have positive net income and negative cash flows. Write one sentence with the statement, "Although we had $5 million in net income for the period, cash flow from operating activities was $ ________."

Paragraph 2: Provide your calculation for cash flow from operating activities. Do this in table format.

Paragraph 3: Explain that the discrepancy between net income and cash flow from operating activities arises because the company uses the accrual method of accounting, which is required under US GAAP. Briefly define the accrual method of accounting. Explain that the calculation of cash flow demonstrates why there is a difference between income and cash. Draw the conclusion company cannot pay dividends. ("Therefore, we cannot pay dividends," or "Because of our ending cash position, we cannot pay dividends.")

Paragraph 4: Finish your memo with a simple statement that says "Let me know if I can provide you any further details." (Or something similar).