ETHICAL DILEMMA Kyma tronic devices. Its most popular product, a portable satellite radio receiver, has been a market leader for years and has helped the company amass a large amount of cash. However, Kyma's financial performance has been somewhat disap- pointing over the last 2 years. Specifically, Kyma's return on assets has decreased by two percentage points, and its stock price has been stagnant. As Kyma's accountant, the CEO has asked you to provide an analysis of the causes of these dis- appointing results and a recommendation that would increase the company's performance measures. Your examination of the company's financial results reveals that Kyma's large cash balance may be a factor in its disappointing performance. While the large cash balance increases the company's liquid- ty, the majority of these funds are invested in short-term, risk- free financial instruments that yield approximately 2%. This low return is a significant cause of the company's declining return on assets measure and has many investors calling for an increased dividend, which the CEO is adamantly against. Instead of paying a dividend, you suggest that Kyma use the Excess cash to finance its customers' purchases of the compa- ny's products. The interest rate charged to provide this finan- cial assistance will be much higher than the rate earned by Kyma's current investment strategy, and this increased return is expected to add at least one percentage point to the com- pany's return on assets. The CEO is very excited about this proposal, but he is concerned about how the increased receivables created by the loans to customers will affect the company's cash flow from operating activities. You state that while this is not spe- cifically addressed by GAAP, you feel that because customer loans arise from the sale of Kyma's products, the associated cash outflow should be classified as an operating activity. The CEO disagrees and decides that the cash outflow associ ated with the lending transaction is an investing activity. He reasons that because GAAP does not specifically address this issue, he has an obligation to the shareholders to make the company's financial statements look as good as possible. If Kyma classifies the lending transaction as an operating activ- ity, it would report declining cash flow from operations and send an incorrect signal to the market as to the company's future. Furthermore, the CEO states that because the matter is simply a classification issue that does not change the compa- ny's total cash flow, no one would be hurt by classifying the transaction as an investing activity. How do you respond to the CEO's statements? GOT IT? 1-1 What information does the statement of cash flows help users assess? 21-2 Briefly describe the three types of activities a company reports in its statement of cash flows. 21-3 Thompson Company sold a piece of equipment that had an original cost of $22,000 and a carrying value of $10,000 for $13,000 in cash. How would this information be reported on a statement of cash flows prepared using the Indirect method? 21-4 Give two examples of a company's (a) cash inflows from investing activities and b) cash outflows for investing activities. 21-5 Give two examples of a company's (a) cash inflows from financing activities and 21-6 Give two examples of a company's investing and financing activities not affecting b) cash outflows for financing activities. cash