Problem 1: (9 points)

Why cant we pay our shareholders a dividend? shouted your new boss. This income statement you prepared for me says we earned $5 million in our first half-year!

You were hired last month as the chief accountant for Cilca Corporation which was organized on July 1 of the year just ended. You recently prepared the financial statements below:

Cilca Corporation

Income Statement

For the Six Months Ended December 31, 2015

($ in million)

Sales Revenue $ 75

Cost of Goods Sold (30)

Depreciation Expense (5)

Remaining Expenses (35)

Net Income $5

Cilca Corporation

Balance Sheet

December 31, 2015 ($ in million)

Current Assets:

Cash $1

Accounts Receivable, Net 20

Inventory 15

Total Current Assets 36

Property, Plant, and Equipment, Net 44

Total Assets $80

Current Liabilities:

Accounts Payable $2

Accrued expenses payable 7

Total Current Liabilities 9

Notes Payable 36

Total Liabilities 45

Stockholders' Equity:

Common Stock 30

Retained Earnings 5

Total Stockholders' Equity 35

Total Liabilities & Stockholders' Equity $80

You have just explained to your boss, Robert James, that although net income was $5 million, operating activities produced a net decrease in cash. Unable to understand your verbal explanation, he has asked you to prepare a written report.

Required:

Prepare a report explaining the apparent discrepancy between Cilcas profitability and its cash flows. To increase the chances of your boss understanding the situation, please include in your report the following items:

A statement of cash flows in good form (using indirect method for operating section).

A narrative explanation of how it is possible for operating activities to simultaneously produce a positive net income and negative net cash flow from operations, and

How operating, investing and financing cash flows are related to the various stages of the product life cycle.

(Hint: as Cilca organized on July 1, 2015, all the beginning balances on balance sheet accounts are zeros.)