CA5-5 WRITING (Cash Flow Analysis) The partner in charge of the Kappeler Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the cash flow statement for the year ended December 31, 2017. Because he must leave on an emergency, he asks you to finish the letter by explaining: (1) the disparity between net income and cash flow, (2) the importance of operating cash flow, (3) the renewable source(s) of cash flow, and (4) possible suggestions to improve the cash position.

KAPPELER CORPORATION Statement of Cash Flows For the Year Ended December 31, 2017
Cash flows from operating activities
Net income		$ 100,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	$10,000
Amortization expense	1,000
Loss on sale of fixed assets	5,000
Increase in accounts receivable (net)	(40,000)
Increase in inventory	(35,000)
Decrease in accounts payable	(41,000)	(100,000)
Net cash provided by operating activities		0
Cash flows from investing activities
Sale of plant assets	25,000
Purchase of equipment	(100,000)
Purchase of land	(200,000)
Net cash used by investing activities		(275,000)
Cash flows from financing activities
Payment of dividends	(10,000)
Redemption of bonds	(100,000)
Net cash used by financing activities		(110,000)
Net decrease in cash		(385,000)
Cash balance, January 1, 2017		400,000
Cash balance, December 31, 2017		$15,000

Date

President Kappeler, CEO Kappeler Corporation 125 Wall Street Middleton, Kansas 67458

Dear Mr. Kappeler:

I have good news and bad news about the financial statements for the year ended December 31, 2017. The good news is that net income of $100,000 is close to what we predicted in the strategic plan last year, indicating strong performance this year. The bad news is that the cash balance is seriously low. Enclosed is the Statement of Cash Flows, which best illustrates how both of these situations occurred simultaneously

Instructions

Complete the letter to the CEO, including the four components requested by your boss.