Question

The Retailing Division of Argon Clothing Inc. provided the following information on its cash flow from operations:

Net Income 675,000

Increase in Accounts Receivable (810,000)

Increase in Inventory (900,000)

Decrease in Accounts Payable (135,000)

Depreciation 150,000

Cash Flow from Operating Activities = 1,020,000

The manager of the Retailing Division provided the accompanying memo with this report: From: Senior Vice President, Retailing Division I am pleased to report that we had earnings of $675,000 over the last period. This resulted in a return on invested capital of 10%, which is near our targets for this division. I have been aggressive in building the revenue volume in the division. As a result, I am happy to report that we have increased the number of new credit card customers as a result of an aggressive marketing campaign. In addition, we have found some excellent merchandise opportunities. Some of our suppliers have made some of their apparel merchandise available at a deep discount. We have purchased as much of these goods as possible in order to improve profitability. I’m also happy to report that our vendor payment problems have improved. We are nearly caught up on our overdue payables balances. Comment on the senior vice president’s memo in light of the cash flow information.

Answer 1

The cash flow statement has a cash inflow of 1020000 from operating activities. This is a good sign for the company as it shows the company's profitabiltiy. The accounts receivables have increased by 810000 showing increase in sales and so has the inventory which is due to an increase in demand. Also the accounts payables have decreased by 135000 signifying payment to the suppliers and vendors. So the senior vice president is right in saying that the sale of products has increased and the payments have improved. Also the increase in inventory shows increased buying resulting from deep discounts provided by the suppliers.