Question
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
"Why can't we pay our shareholders a dividend?" shouted your new boss. "This income statement you prepared for me says we earned $5 million in our first half-year!"
You were hired last month as the chief accountant for Enigma Corporation, which was organized on July 1 of the year just ended. You recently prepared the financial statements below.
ENIGMA CORPORATION
Income Statement
For the Six Months Ended December 31, 2021
($ in millions)Sales revenue$75Cost of goods sold(30)Depreciation expense(5)Remaining expenses(35)Net income$5
ENIGMA CORPORATION
Balance Sheet
December 31, 2021
($ in millions)Cash$1Accounts receivable (net)20Merchandise inventory15Equipment (net)44Total$80Accounts payable$2Accrued liabilities7Notes payable36Common stock30Retained earnings5Total$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 prepar a written reportexplaining the apparent discrepancy between Enigma's profitability and its cash flows. To increase the chances of your boss's understanding the situation, you want to include in your report a determination of net cash flows from operating activities demonstrating how it is possible for operating activities to simultaneously produce a positive net income and negative net cash flows.
Required:
1.Determine net cash flows from operating activities by using the direct method.(Enter your answers in thousands (i.e., 10,000 should be entered as 10). Amounts to be deducted should be indicated with a minus sign.)
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