Question

Sears lost over $2 billion last year and over $1 billion the year before. However, looking at their Statement of Cash Flows, they somehow managed to increase their cash balance position $50 million. Explain how this was accomplished. Also, explain how the CEO could justify that this shows that Sears is in position to make a big turnaround. Net Income -383,000 Operating Activities, Cash Flows Provided By or Used In Depreciation 378,000 Adjustments To Net Income -2,753,000 Changes In Accounts Receivables Changes In Liabilities -1,057,000 Changes In Inventories 1,144,000 Changes In Other Operating Activities 829,000 Total Cash Flow From Operating Activities -1,842,000 Investing Activities, Cash Flows Provided By or Used In Capital Expenditures -80,000 Investments 293,000 Other Cash flows from Investing Activities 1,681,000 Total Cash Flows From Investing Activities 1,894,000 Financing Activities, Cash Flows Provided By or Used In Dividends Paid Sale Purchase of Stock Net Borrowings 41,000 Other Cash Flows from Financing Activities Total Cash Flows From Financing Activities -2,000 Effect Of Exchange Rate Changes Change In Cash and Cash Equivalents 50,000

Answer 1

Growing your cash situation does not mean that you have by this time earned a net income throughout the year. Even though the company was functioning at a loss, it may possibly still end in a net increase in its cash since the recording of income and expenses to regulate the company's net income is on an accretion basis, meaning expenses are detailed as sustained and not when paid and revenues are logged when earned not when cash are received. The CEO could validate that Sears is in a position to make a big development as the company has no problems on liquidity given the large amount of cash that it has. It can exploit and benefit from on this by making investments and equipment advancements that could perhaps lead to the increase in the company's lucrativeness in the near future.