Chapter 13: Statement of Cash Flows Cash Flow Per Share

Head Donuts Inc. is a retailer of designer headphones, earphones, and hands-free audio devices. Polly Ester, the company president, is reviewing the companys financial statements after the close of the fiscal year and is troubled that earnings decreased by 10%. She shares her concerns with the companys chief accountant, Lucas Simmons, who points out that the drop in earnings was balanced by a 20% increase in cash flows, from operating activities. Polly is encouraged by the increase in cash flows from operating activities, but is worried that investors might miss this information because it is buried in the statement of cash flows. To make it easier for investors to find this information, she instructs Lucas to include an operating cash flow per share number on the face of the income statement, directly below earnings per share. While Lucas is concerned about using such an unconventional financial reporting tactic, he agrees to include the information on the income statement.

Is Lucas behaving in an ethical and professional manner? Explain your answer.

Using The Statement of Cash Flows

You are considering an investment in a new start-up company, Giraffe Inc., an Internet service provider. A review of the companys financial statements reveals a negative retained earnings. In addition, it appears as though the company has been running a negative cash flow from operating activities since the companys inception.

How is the company staying in business under these circumstances? Could this be a good investment?