Concept for Analysis 5-5 (Essay)

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, 2017Cash 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 expense1,000

Loss on sale of fixed assets5,000

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 . . .

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