Question

As consultants in advisory services at an accounting firm, we are hired by management of Gadberry to advise on cash flow reporting. Management is concerned about the relatively small net increase in cash, and how the company is doing compared to competitors Nessly and Tootsey. The following Tableau Dashboard will assist in our analysis.

Gadberry (green) Operating Activities: $40,000

Nessly (Red) Investing Activites: $15,000

Nessly (Orange) Financing: $25,000

Tootsey (Green) Operating Activities: $10,000

Gadberry (Red) Investing Activities: $(4,000)

Gadberry (Orange) Financing Activities: $(34,000)

Nessly (Green) Operating Activites: $(30,000)

Tootsey (Red) Investing: $(9,000)

Nessly (Pink Circle) Net Income/Loss: $(33,000)

Tootsey (Yellow Circle) Net Income/Loss: $12,000

Gadberry (Purple Circle) Net Income/Loss: $45,000

Management of Gadberry wants an explanation as to why financing activities created such a large cash outflow. Which of the following is a reasonable explanation for an outflow?
2. Management of Gadberry wants to know how it might be able to generate positive cash inflows from investing activities next year. Which of the following actions would help achieve this goal?
3. Management of Gadberry is wondering how net cash provided by operating activities reported on the statement of cash flows is different than reported net income. Which of the following would explain the amount of difference for Gadberry?
4. Which of the following would explain the amount of net cash used in investing activities reported on Gadberry’s statement of cash flows?
5. Which of the following would explain the amount of net cash used in financing activities reported on Gadberry’s statement of cash flows?

Options for the last table

• Decrease in interest payable of $7,000; increase in prepaid expenses of $2,000.

• Depreciation expense of $3,000; gain on sale of plant assets of $2,000; decrease in accounts payable of $6,000.

• Depreciation expense of $3,000; Increase in inventory of $1,500; decrease in interest payable of $7,000.

• Gain on retirement of notes of $4,000; increase in accounts receivable of $6,000; increase in income taxes payable of $3,000.

Answer 1

1. Reasonable explanation for a financing outflow:

Paid dividends to shareholders.

Purchased treasury stock.

Payment of dividends and purchase of treasury stock would both result in financing cash outflow.

Issuance of more common stock, issuance of long-term debt, and issuance of preferred stock would result in financing cash inflows.

2. Actions to generate positive inflows from investing activities:

Selling an intangible asset.

Selling the company's old factory.

Loaning money to another business in return for a note receivable.

Acquiring a new truck, and purchasing a patent would result in an investing cash outflow while selling a short-term investment would result in an operating cash inflow.

3. Difference between net income and cash provided by operating activities: Depreciation expense of $3,000; gain on sale of plant assets of $2,000; decrease in accounts payable of $6,000.

Net income		45000
Adjustments to reconcile net income to net cash from operations:
Depreciation expense	3000
Gain on sale of plant assets	-2000
Decrease in accounts payable	-6000	-5000
Net cash provided by operating activities		40000

Provide options for 4 and 5 under comments section.