Chapter 13 Statement of Cash Flows 627Activity 13-3
Profit vs. cash flows and
management decision making
Toni Lance, president of Fine Fashions 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 Toni Lance and Fine Fashions’ con-
troller, Tom Kee, in January, after the close of the fiscal year.Toni:I have 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 is not going to look
good to our shareholders. Isn’t there anything we can do about this?
Tom: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.
Toni:No, no. I’m not suggesting that we “cook the books.” But look at the cash flow from op-
erating activities on the statement of cash flows. The cash flow from operating activities
has increased by 20%. This is very good news—and, I might add, useful information. The
higher cash flow from operating activities will give our creditors comfort.
Tom: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.
Toni:This is true, but somehow I feel that 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 in-
come 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?
Tom: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, under the earnings per share. Users would
really benefit from this disclosure. Thanks for the idea—I’ll start working on it.
Toni:Glad to be of service.How would you interpret this situation? Is Tom behaving in an ethical and professional
manner?You are considering an investment in a new start-up Internet company, VideosToGo.com Inc. A
review of the company’s financial statements reveals a negative retained earnings. In addition,
it appears as though the company has been running a negative cash flow from operating activ-
ities since the company’s inception.
How is the company staying in business under these circumstances? Could this be a good
investment?The Retailing Division of Biltmore Company provided information on its cash flow from oper-
ations as shown below.Net income $ 450,000
Increase in accounts receivable (340,000)
Increase in inventory (300,000)
Decrease in accounts payable (90,000)
Depreciation 100,000
Cash flow from operating activities $(180,000)Activity 13-1
Ethics and professional
conduct in business
Activity 13-2
Using the statement of cash
flows
BUSINESS ACTIVITIES AND RESPONSIBILITY ISSUES