Chapter 21 Discussion - Why can’t we pay our shareholders
Chapter 21 Discussion Question
“Why can’t we pay our shareholders a dividend?” shouted your new boss. “This income statement you prepared for me says we earned $5 million in our first half-year!”
You were hired last month as the chief accountant for Enigma Corporation, which was organized on July 1 of the year just ended. You recently prepared the financial statements below.
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ENIGMA CORPORATION |
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Income Statement |
|
|
For the Six Months Ended December 31, 2024 |
|
|
($ in millions) |
|
|
Sales revenue |
$75 |
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Cost of goods sold |
(30) |
|
Depreciation expense |
(5) |
|
Remaining expenses |
(35) |
|
Net income |
$5 |
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ENIGMA CORPORATION |
|
|
Balance Sheet |
|
|
December 31, 2024 |
|
|
($ in millions) |
|
|
Cash |
$1 |
|
Accounts receivable (net) |
20 |
|
Merchandise inventory |
15 |
|
Equipment (net) |
44 |
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Total |
$80 |
|
Accounts payable |
$2 |
|
Accrued liabilities |
7 |
|
Notes payable |
36 |
|
Common stock |
30 |
|
Retained earnings |
5 |
|
Total |
$80 |
You 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 asked you to prepare a written report explaining 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.
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Solution: Chapter 21 Discussion - Why can’t we pay our shareholders