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The 2015 comparative income statement and the 2015 comparative balance sheet of Golf America,...

Question:

The 2015 comparative income statement and the 2015 comparative balance sheet of Golf America, Inc. have just been distributed at a meeting of the company's Board of Directors. The members of the board raise a fundamental question: Why is the cash balance so low? This question is especially hard to understand because 2015 showed record profits. As the controller of the company, you must answer the question.

GOLF AMERICA, INC Comparative Balance Sheet December 31, 2015 and 2014 (in thousands)

2015 2014
Assets
Current Assets:
Cash $25 $65
Accounts Receivable 72 61
Merchandise Inventory 194 181
Long-term Assets:
Plants Assets, Net 125 61
Patents 177 188
Long-term Investments 31 0
Total Assets $624 $554
Liabilities
Current Liabilities:
Accounts Payable $63 $56
Accrued Liabilities 12 17
Long-term Liabilities:
Notes Payable 179 264
Total Liabilities 254 337
Stockholders' Equity
Common Stock 149 61
Retained Earnings 221 156
Total Stockholders' Equity 370 217
Total Liabilities and Stockholders' Equity $624 $554

GOLF AMERICA, INC. Income Statement Year Ended December 31, 2015 (in thousands)

2015 2014
Sales revenue $444 $310
Cost of goods sold 221 162
Gross profit 223 148
Operating expenses:
Salaries Expense 48 28
Depreciation Expense 46 22
Total operating expenses 94 50
Operatin income 129 98
Other revenues and (expenses)
Gain on sale of equipment (sales price, $33) 0 18
Loss on sale of Land (sales price, $61 0 (35)
Amortization expense (11) (11)
Total other revenues and (expenses) (24) (48)
Net income $105 $50

Requirements:

i) Prepare a statement of cash flows for 2015 in the format that best shows the relationship between net income and net operating cash flow. The company sold no plant assets or long-term investments and issued no notes payable during 2015. There were no non-cash investing and financing transactions during the year. Show all amounts in thousands.

ii) Considering net income and the company's cash flows during 2015, was it a good year or a bad year? Give your reasons.

Statement of Cash Flow:

The statement of cash flow melts the activity of the recent profit and loss statement and the last two balance sheets to calculate the changes in cash accounts over two periods. The statement includes three sections; operating, investing, and financing activities sections.

Answer and Explanation:


The operating activities section of the statement of cash flow merges the operations of the income statement and the net adjustment in the working capital items on the balance sheet; current assets and current liabilities. The statement then adjusts for investing activities which include the net changes to non-current assets. The financing activities section of the statement of cash flow reconciles net changes to non-current liabilities and equity sections of the balance sheet. The net changes calculated in the three sections are combined with the beginning cash balance balances to determine the ending cash balance.


i) Statement of cash flows for 2015


GOLF AMERICA, INC

Statement of Cash Flow

For the year ending December 31, 2015

Cash flows from operating activities
Profit 105
Adjustments for:
Depreciation Expense 46
Amortization expense 11
Working capital changes:
(Increase) / Decrease in trade and other receivables -11
(Increase) / Decrease in inventories -13
(Increase) / Decrease in Prepaid Expenses 0
Increase / (Decrease) in Accounts Payable 7
Increase / (Decrease) in Accrued Liabilities -5
Increase / (Decrease) in Interest Payable 0
Increase / (Decrease) in Income Tax Payable 0
Net cash generated (used) from operating activities 140
Cash flows from investing activities
Sale (Purchase) of Property, Plant, and Equipment -64
Sale (Acquisition) of portfolio investments -31
Net cash generated (used) from investing activities -95
Cash flows from financing activities
Proceeds (payments) from Note Payable -85
Net cash generated (used) from financing activities -85
Net increase in cash and cash equivalents -40
Cash and cash equivalents at beginning of period 65
Cash and cash equivalents at end of period 25


ii) Considering net income and the company's cash flows during 2015, was it a good year or a bad year? Give your reasons.


The year was good. Net income more than doubled for the year and net cash generated from operating activities was $140. In addition operating activities were sufficient in expanding investing activities and the excess funds in addition to $40 of beginning cash reserves were utilized to pay down long term debt. As a result, cash did decline but the company is less leveraged due to the payment of long term debt.


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Using the Statement of Cash Flows for Decision Making

from Accounting 101: Financial Accounting

Chapter 12 / Lesson 5
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