Assume you are the controller of a large corporation, and the chief executive officer (CEO) has requested that you explain to them why the net income that you are reporting for the year is so low, when the CEO knows for a fact that the cash accounts are much higher at the end of the year than they were at the beginning of the year. Write a memo to the CEO to offer some possible explanations for the disparity between financial statement net income and the change in cash during the year.
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- Consider the dilemma you might someday face if you are the chief financial officer of a company that is struggling to maintain a positive cash flow, despite the fact that the company is reporting a substantial positive net income. Maybe the problem is so severe that there is often insufficient cash to pay ordinary business expenses, like utilities, salaries, and payments to suppliers. Assume that you have been asked to communicate to your board of directors about your companys year, in retrospect, as well as your vision for the companys future. Write a memo that expresses your insights about past experience and present prospects for the company. Note that the challenge of the assignment is to keep your integrity intact, while putting a positive spin on the situation, as much as is reasonably possible. How can you envision the situation turning into a success story?arrow_forwardThe partner in charge of the Kappeler Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the cash flow statement for the year ended December 31, 2020. Because he must leave on an emergency, he asks you to finish the letter by explaining: (1) the disparity between net income and cash flow, (2) the importance of operating cash flow, (3) the renewable source(s) of cash flow, and (4) possible suggestions to improve the cash position. Kappeler CorporationStatement of Cash FlowsFor the Year Ended December 31, 2020 Cash flows from operating activities Net income $ 100,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 10,000 Amortization expense 1,000 Loss on sale of fixed assets 5,000 Increase in accounts receivable (net) (40,000) Increase in inventory (35,000) Decrease in accounts payable (41,000) (100,000) Net…arrow_forwardIDENTIFY THE EFFECT OF THE FOLLOWING TRANSACTIONS TO THE RISK OF MATERIAL MISSTATEMENT TO FINANCIAL STATEMENTS. (INCREASE, DECREASE, NO EFFECT) 1.The company has shown an ability to generate a positive cash flow from operations, while reporting earnings and earnings growth. 2.The employees of the company are being paid on a weekly basis. 3. The internal audit reports to the chairman of the board who is a minority stockholder. 4. The company recently opened up its new international branch in HongKong, catering to OFWs in that location. 5. The accounting department has experienced a low turnover rate of key personnearrow_forward
- Ethics and income Reporting You have been hired as an “accounting consultant” by Watson Company to evaluate its financial reporting policies. Watson is a small corporation with a few shareholders owning stock that is not publicly traded. In a discussion with you, Chris Watson, the company president, say, “ For Watson Company’s annual income statement, it is our policy to always record and report revenues when we collect the cash and to record and report expenses when we pay the cash. I like this approach, and I think our shareholders and creditors do too. This policy results in income that is reliable and conservative, which is the way accounting should be. Besides, it is easy to keep track of our income. All I need are the receipts and payments recorded in the company’s checkbook.” Required: From financial reporting and ethical perspectives, how would you reply to Chris?arrow_forwardIn your view, what would cause the cash book of an enterprise to disagree with the bank statement at the of month? Explain what you would include under Cost of sales of an enterprise during the preparation of final accounts for your organization?arrow_forwardI need help filling out the excel template with this given information. Kate has just completed her first year of Kate's Cards. She has been preparing monthly income statements and balance sheets, so she knows that her company has been profitable and that there is cash in the bank. She has not, however, prepared a statement of cash flows. Kate's provides you with the year-end income statement and balance sheet and asks that you construct an statement of cash flows for Kate's Cards.Additional information:1. There were no disposals of equipment during the year2. Dividends in the amount of $1,300 were paid in cash during the year.3. Prepaid expenses relate to operating expenses.Requireda. Construct an statement of cash flows for Kate's Cards for the year-ended August 31, 2019, using the indirect method. Hint: Since this was Kate's first year of operations, the beginning balance sheet account balances were zero.b. Construct an statement of cash flows for Kate's Cards for the year ended…arrow_forward
- Your managers showed you the income statement for your company. The income statement shows a net income of 5.4%, yet your manager says the company will need to borrow money to meet their financial obligations. How is this possible? Please address the following issues in your discussion this week: How can a company make a profit and still be short of cash? In accrual accounting, we record sales when they occur, not when the cash is collected. How does this affect cash flow? How does the purchase of fixed assets or additional inventory adversely affect cash flow?arrow_forwardA senior financial executive for a large public company remarked to a stock market analyst: I don ’ t know why you people worry so much about what is in our statement of cash flows. Managing cash flow is our responsibility as managers; it involves paying close attention to cash on a daily basis. Why don ’ t you pay attention to our profit and just forget about cash flow? We ’ ll look after that! Respond to the executive ’ s comments. You do not have to agree or disagree entirely.arrow_forwardLucas 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 companys 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: Ive 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 wont 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 isnt much that can be done about it. Our financial statements were prepared according to generally accepted accounting principles, and I dont see much leeway for significant change at this point. Lucas: No, no. Im not suggesting that we cook the books. But look at the cash flow from operating activities on the statement of cash flows. The cash flow from operating activities has increased by 20%. This is very good newsand, I might add, useful information. The higher cash flow from operating activities will give our creditors comfort. 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 dont 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 statementsomeplace 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: Ive 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 ideaIll 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?arrow_forward
- A new manager of a retail company suggests that the company should prepare its Statement of Profit or Loss on the basis of cash receipts and cash expenditures (except for the acquisition of fixed assets, such as plant and equipment). He argues that managers, investors, creditors, and others are more interested in cash receipts and disbursements than in accrual-based accounting. Do you think he is correct? Explain.arrow_forwardRequired Indicate whether the information is more representative of managerial versus financial accounting. The first item is shown as an example. Information Item: Estimates of future revenue GAAP-based product cost Salary of the manager of a particular branch of a bank Salary expense for all company employees shown in the income statement Historical-based information included in financial statements Reporting rules established by government authorities Reports designed for the company president Daily time clock reports A company's annual report to stockholders Budgets Information provided to investors and creditors Vacation schedules for key employees Customer satisfaction survey results Amount of total assets shown on the balance sheet Managerial accountingarrow_forwardImagine that you are the new department manager of a corporation within your chosen field: you discover that your predecessor had been using cash basis of accounting, which has resulted in many errors and misinformation. What measures would you take to remediate the issue? Propose a high-level plan to implement a proper accounting system for your department using specific principles. For example, which financial statements would you investigate first? What sort of internal controls would you implement?arrow_forward
- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax CollegeFinancial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning