Ramea Environmental Insulation Ltd. (Ramea) manufacturers a low-cost, highly efficient insulation for use in buildings. The company is private and has one shareholder. The product was invented about seven years ago and was introduced to the market soon after. Sales grew slowly in the first few years but increasing awareness among builders and homeowners and higher heating costs have caused sales to increase dramatically over the last few years. The company has been unable to keep up with customer demand and is concerned it will lose business to competitors, even those with inferior products. Ramea’s sales have increased over the last few years by almost 600 percent and profits have increased from \($75,000\) in 2011 to \($1\) million in the year ended December 31, 2015. Despite its success, Ramea is using up cash very quickly and management is worried that it won’t have enough to operate successfully. You have been provided with Ramea’s cash flow statements for the years ended December 31, 2014 and 2015. Prepare a report to management explaining the reasons for the company’s cash problems despite its profitability. Management has also asked for any suggestions you might have to improve the situation.

Required:
Prepare the report.

Transcribed Image Text:

Ramea Ltd. Statement of Cash Flows For the Years Ended December 31, 2015 2014 Net income $1,000,000 $875,000 Items not affecting cash: Depreciation 325,000 260,000 1,325,000 1,135,000 Changes in non-cash working capital accounts Accounts receivable (455,000) (260,000) Inventory (683,000) (377,000) Prepaids 9,100 (19,500) Accounts payable and accrued liabilities 127,500 162,500 323,600 641,000 Financing activities Issue of long-term debt 1,300,000 0 Bank loans 552,500 650,000 Repayment of long-term debt (292,500) (292,500) Issue of shares 0 1,950,000 Dividends paid (230,000) (130,000) 1,330,000 2,177,500 Investing activities Purchase of property, plant, and equipment (2,950,000) (1,625,000) (2,950,000) (1,625,000)