Kayla Martchenko has just received a small inheritance from her grandparents’ estate. She would like to invest the money and is currently reviewing several opportunities. A friend has given her the financial statements of Robertson Furniture Ltd., a company she found on the Internet. Kayla has reviewed the financial statements and is ready to invest in Robertson Furniture.
Before she invests, Kayla comes to you for some financial advice, because she knows you are taking an accounting course and may be able to give her some insights into the financial statements. She is convinced that this company will be a profitable investment because the statement of financial position indicates that the company’s cash balances have been increasing very rapidly, from only $8,000 two years ago to $354,000 now.
Kayla has copied Robertson’s statement of cash flows for you, so that you can see how much cash the company has been able to generate each year.

Required

a. Comment on Robertson Furniture’s statement of cash flows and address Kayla’s opinion that, in light of the amount of cash it has generated, the company must be a good investment.

b. Based on the results of your analysis of Robertson’s statement of cash flows, outline several points that Kayla should investigate about this company before investing her inheritance in it.

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ROBERTSON FURNITURE LTD. Statement of Cash Flows For the year ended December 31 2020 2019 Operating activities: $ (4,000) $ 12,000 Net income (loss) Add back items not representing cash flows: Depreciation expense 20,000 40,000 Loss on disposal of property, plant, and equipment 12,000 10,000 Loss on sale of investments 4,000 3,000 Adjustment for working capital items: Increase in accounts receivable (40,000) (36,000) Increase in inventory (42,000) (54,000) Decrease in prepaid insurance 8,000 2,000 Increase in accounts payable 45,000 28,000 17,000 Cash flow from operating activities (9,000) Financing activities: Issuance of bonds payable 100,000 20,000 30,000 Issuance of shares 50,000 Payment of dividends (2,000) (20,000) 30,000 Cash flow from financing activities 148,000 Investing activities 70,000 Sale of property, plant, and equipment 22,000 Sale of investments 50,000 20,000 120,000 Cash flow from investing activities 42,000 Overall increase in cash during year 259,000 89,000 Cash-beginning of year Cash end of year 97,000 8,000 $ 97,000 $356,000