Lucas Hunter, president of Simmons Industries Inc., believes that reporting operating cash flow per share on the income statement would be a useful addition to the company’s just completed financial statements. The following discussion took place between Lucas Hunter and Simmons’ controller, John Jameson, in January, after the close of the fiscal year:
Lucas: I’ve been reviewing our financial statements for the last year. I am disappointed that our net income per share has dropped by 10% from last year. This won’t look good to our shareholders. Is there anything we can do about this?
John: What do you mean? The past is the past, and the numbers are in. There isn’t much that can be done about it. Our financial statements were prepared according to generally accepted accounting principles, and I don’t see much leeway for significant change at this point.
Lucas: No, no. I’m not suggesting that we “cook the books.” But look at the cash flow from operating activities on the statement of
John: Well, the cash flow from operating activities is on the statement of cash flows, so I guess users will be able to see the improved cash flow figures there.
Lucas: This is true, but somehow I think this information should be given a much higher profile. I don’t like this information being “buried” in the statement of cash flows. You know as well as I do that many users will focus on the income statement. Therefore, I think we ought to include an operating cash flow per share number on the face of the income statement—someplace under the earnings per share number. In this way, users will get the complete picture of our operating performance. Yes, our earnings per share dropped this year, but our cash flow from operating activities improved! And all the information is in one place where users can see and compare the figures. What do you think?
John: I’ve never really thought about it like that before. I guess we could put the operating cash flow per share on the income statement, underneath the earnings per share amount. Users would really benefit from this disclosure. Thanks for the idea—I’ll start working on it.
Lucas: Glad to be of service.
How would you interpret this situation? Is John behaving in an ethical and professional manner?
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Financial Accounting
- The Commercial Division of Tidewater Inc. provided the following information on its cash flow from operations: The manager of the Commercial Division provided the accompanying memo with this report: From: Senior Vice President, Commercial Division I am pleased to report that we had earnings of 945,000 over the last period. This resulted in a return on invested capital of 8%, which is near our targets for this division. I have been aggressive in building the revenue volume in the division. As a result, I am happy to report that we have increased the number of new credit card customers as a result of an aggressive marketing campaign. In addition, we have found some excellent merchandise opportunities. Some of our suppliers have made some of their apparel merchandise available at a deep discount. We have purchased as much of these goods as possible in order to improve profitability. Im also happy to report that our vendor payment problems have improved. We are nearly caught up on our overdue payables balances. Comment on the senior vice presidents memo in light of the cash flow information.arrow_forwardEthics and the Manager M. K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that the company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the new year—including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Gallant ordered the company’s controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs that are…arrow_forwardThe management of ABC Company felt proud of their accomplishments concerning cash flow for the end of the year because overall cash increased by $1,500,000. In the operating section, the company showed an increase in cash of $250,000 because of net income. However, because of increases in accounts receivable and inventory, the overall cash outflow from operating activities was $100,000. In the investing section, purchases of long-term assets outweighed the sale of long-term assets which resulted in a cash outflow from investing activities of $500,000. The company has a line-of-credit with the bank. During the year, the company drew on the line which resulted in cash inflow from financing activities of $2,100,000. The cash inflow from financing activities of $2,100,000 less the cash outflow from operating activities of $100,000 and less the cash out flow from investing activities resulted in the overall cash increase of $1,500,000. Analyze the cash flows of ABC Company. What conclusions…arrow_forward
- Jiang Ltd has recently produced its financial statements for the current year. The directors of the company are concerned that the return on capital employed (ROCE) has decreased from 14% last year to 12% for the current year.The following reasons were suggested as to why this reduction in ROCE has occurred. an increase in the gross profit margin a reduction in sales revenue an increase in overhead expenses an increase in amount of inventories held the repayment of a loan at the end of the year an increase in time taken for trade receivables to be paid Taking each of these 6 suggested reasons in turn, state, with reasons, whether each of them could lead to a reduction in ROCE ROCE = (EBIT/Sales Revenue) x (Sales revenue/Long term capital)arrow_forwardREFER TO IMAGE FOR NUMBERS Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend in terms of actual dollar increases. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company’s line of credit for 20X4 was…arrow_forwardKim's Chemical Company reported total expenses for the year of $432,000, of which $378,000 of the expenses were paid in cash and the remainder will be paid in the following year. What effect did these activities have on the balance sheet of Kim's Chemical Company? Decrease total stockholders' equity by $378,000 and decrease total assets by $378,000. Decrease total assets by $432,000, decrease total liabilities by $54,000, and decrease total stockholders' equity by $378,000. Decrease total assets by $432,000 and decrease total stockholders' equity by $432,000. Decrease total stockholders' equity by $432,000, decrease total assets by $378,000 and increase total liabilities by $54,000. None of the above.arrow_forward
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