Written Communication
“Why can’t we pay our shareholders a dividend?” shouts your new boss at Polar Opposites. “This income statement you prepared for me says we earned $5 million in our first year!” You recently prepared the financial statements below.
POLAR OPPOSITES Income Statement For the year ended December 31, 2018 |
|
($ in millions) | |
Net sales | $65 |
Cost of goods sold | (35) |
(4) | |
Operating expenses | (21) |
Net income | $ 5 |
POLAR OPPOSITES Balance Sheet December 31, 2018 |
|
($ in millions) | |
Cash | $ 1 |
Accounts receivable (net) | 16 |
Merchandise inventory | 14 |
Machinery (net) | 44 |
Total assets | $75 |
Accounts payable | $ 7 |
Accrued expenses payable | 9 |
Notes payable | 29 |
Common stock | 25 |
5 | |
Total liabilities and stockholders’ equity | $75 |
Although net income was $5 million, cash flow from operating activities was a negative $5 million. This just didn’t make any sense to your boss.
Required:
Prepare a memo explaining how net income could be positive and operating
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