Question

The cash flow from operations and cash flow from investing are both positive. Which of the following best describes the situation? 2004 2005 Net income $189 $170 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 201 173 Deferred income taxes 14 (20) Restructuring charges 80 90 Accounts receivable 30 20 Inventory (30) 50 Current liabilities 10 30 Cash flow from operations 494 513 Sale of equipment 200 300 Purchase of equipment (130) (120) Cash flow from investing 70 180 Dividends (120) (130) Long-term debt (440) (440) Cash flow from financing (560) (570

A. The cash flow statement would indicate there are no reasons for concern.
B. Repayment of long-term debt indicates the company is becoming more profitable.
C. The company appears to be liquidating assets of the company that may affect future profitability.
D. Increased operating and investing cash flows in 2005, relative to 2004, indicate increased profitability in 2005.

Answer 1

D. Increased operating and investing cash flows in 2005, relative to 2004, indicate increased profitability in 2005 best describes the situation.

Reason and explanations:

We could not be sure that the cash flow statement indicates that there are no areas of concern because there may be other contingent liabilities which the company may be required to bear in future which are not reflected in the cash flow statement while it is reflected in notes to accounts of the financial statements.

Also, repayment of long-term debt is a compulsory debt which needs to be paid periodically since it will increase the interest expense of the company while repaying it will ensure the cash flows are managed properly.

The company is not liquidating its assets it is earning profts from its operating activities and through sale of equipment on profit of $70.

Therefore, the activities of the company indicates better profitability in 2005 as compared to 200.4