Discuss the relation between net income and cash flow

Assignment Help Financial Accounting

Reference no: EM13901549

PREPARING A STATEMENT OF CASH FLOWS FROM BALANCE SHEETS AND INCOME STATEMENTS. GTI, Inc., manufactures parts, components, and processing equipment for electronics and semiconductor applications in the communica- tions, computer, automotive, and appliance industries. Its sales tend to vary with changes in the business cycle because the sales of most of its customers are cyclical. Exhibit 3.34 presents bal- ance sheets for GTI as of December 31, Year 7 through Year 9, and Exhibit 3.35 presents income statements for Year 8 and Year 9.

GTI, Inc. Balance Sheets (amounts in thousands) (Problem 3.25)
December 31:	Year 9	Year 8	Year 7
ASSETS
Cash	$ 367	$ 475	$ 430
Accounts receivable	2,545	3,936	3,768
Inventories	2,094	2,966	2,334
Prepayments	122	270	116
Total Current Assets	$5,128	$ 7,647	$ 6,648
Property, plant, and equipment, net	4,027	4,598	3,806
Other assets	456	559	193
Total Assets	$9,611	$12,804	$10,647
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	$ 796	$ 809	$ 1,578
Notes payable to banks	2,413	231	11
Other current liabilities	695	777	1,076
Total Current Liabilities	$3,904	$ 1,817	$ 2,665
Long-term debt	2,084	4,692	2,353
Deferred income taxes	113	89	126
Total Liabilities	$6,101	$ 6,598	$ 5,144
Preferred stock	$ 289	$ 289	$ -
Common stock	85	85	83
Additional paid-in capital	4,395	4,392	4,385
Retained earnings	(1,259)	1,440	1,035
Total Shareholders' Equity	$3,510	$ 6,206	$ 5,503
Total Liabilities and Shareholders' Equity	$9,611	$12,804	$10,647

Required

a. Prepare a worksheet for the preparation of a statement of cash flows for GTI, Inc., for Year 8 and Year 9. Notes to the firm's financial statements reveal the following (amounts in thousands):

(1) Depreciation expense was $641 in Year 8 and $625 in Year 9. GTI, Inc., did not sell any fixed assets during Year 8 and Year 9.

(2) Other Assets represents patents. Patent amortization was $25 in Year 8 and $40 in Year 9. GTI, Inc., sold a patent during Year 9 at no gain or loss.

(3) Changes in Deferred Income Taxes are operating activities.

b. Discuss the relation between net income and cash flow from operations and the pat- tern of cash flows from operating, investing, and financing activities.

GTI, Inc. Income Statements (amounts in thousands) (Problem 3.25)
Year Ended December 31:	Year 9	Year 8
Sales	$11,960	$22,833
Cost of goods sold	(11,031)	(16,518)
Selling and administrative expenses	(3,496)	(4,849)
Interest expense	(452)	(459)
Income tax expense	328	(590)
Net Income	$(2,691)	$ 417
Dividends on preferred stock	(8)	(12)
Net Income Available to Common	$(2,699)	$ 405

Reference no: EM13901549

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