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) Depreciation expense (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 Retained earnings 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 cash flows is negative. Include in your report the calculation of operating cash flows of negative $5 million using the indirect method
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)
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