"Why can't we pay our shareholders a dividend?" shouted your new boss. "This income statement you prepared for me says we earned $5 million in our first half-year!" You were hired last month as the chief accountant for Enigma Corporation which was organized on July 1 of the year just ended. You recently prepared the financial statements below: ENIGMA CORPORATION Income Statement For the Six Months Ended December 31, 2011 ($ in millions) Sales Revenue $75 Cost of goods sold ($30) Depreciation expense ($5) Remaining expenses ($35) Net income $5 ENIGMA CORPORATION Balance Sheet December 31, 2011 ($ in millions) Cash $1 Accounts receivable (net) $20 Merchandise inventory $15 Machinery (net) 44 TOTAL $80 Accounts Payable $2 Accrued expenses payable $7 Notes payable $36 Common stock $30 Retained earnings $5 TOTAL $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 300-500 word report explaining the apparent discrepancy between Engima's profitability and its cash flows. To increase the chances of your boss's understanding the situation, include in your report a determination of net cash flows from operating activities by both the direct and indirect methods. Your report should also include a narrative explanation of how it is possible for operating activities to simultaneously produce a positive net income and negative net cash flows.

"Why can't we pay our shareholders a dividend?" shouted your new boss. "This income statement you prepared for me says we earned $5 million in our first halfyear!" You were hired last month as the chief accountant for Enigma Corporation which was organized on July 1 of the year just ended. You recently prepared the financial statements below: ENIGMA CORPORATION Income Statement For the Six Months Ended December 31, 2011 ($ in millions) Sales Revenue $75 Cost of goods sold ($30) Depreciation expense ($5) Remaining expenses ($35) Net income $5 ENIGMA CORPORATION Balance Sheet December 31, 2011 ($ in millions) Cash $1 Accounts receivable (net) $20 Merchandise inventory $15 Machinery (net) 44 TOTAL $80 Accounts Payable $2 Accrued expenses payable $7 Notes payable $36 Common stock $30 Retained earnings $5 TOTAL $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 300500 word report explaining the apparent discrepancy between Engima's profitability and its cash flows. To increase the chances of your boss's understanding the situation, include in your report a determination of net cash flows from operating activities by both the direct and indirect methods. Your report should also include a narrative explanation of how it is possible for operating activities to simultaneously produce a positive net income and negative net cash flows