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:

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.)

Cilca Corporation Income Statement For the Six Months Ended December 31, 2015 ($ million) Sales Revenue Cost of Goods Sold Depreciation Expense Remaining Expenses Net Income $ 75 (30) (35) S5 Cilca Corporation Balance Sheet December 31,2015 (S in million) Current Assets: Cash Accounts Receivable, Net Inventory $1 20 15 36 Total Current Assets Property, Plant, and Equipment, Net Total Assets $80 Current Liabilities Accounts Payable $2 Accrued expeuses payable Total Current Liabilities Notes Payable Total Liabilities Stockholders' Equity: avable 36 45 Common Stock Retained Earnings 30 Total Stockholders' Equity Total Liabilities & Stockholders' Equity 35 $80