Case # D

Cash Flow Statement (SCF)

The partner in charge of the Johnson Corporation audit come by your desk and leaves a letter
he has started to the CEO and a copy of the cash flow statement for the year ended December
31, 2021. Because he must leave on emergency, he asks you to finish the letter by explaining:
(1) the disparity between net profit and cash flow; (2) the importance of operating cash flow;
(3) the renewable source(s) of cash flow; and (4) possible suggestions to improve the cash
position.

Johnson Corporation
Statement of Cash Flows
for the Year Ended December 31, 2021
Cash flows from operating activities:
Net profit $100,000
Adjustments to reconcile net profit to net cash from operating
activities
Depreciation expense 10,000
Amortization expense 1,000
Loss on sale of fixed assets 5,000
Increase in accounts receivable (net) (40,000)
Increase in inventory (35,000)
Decrease in accounts payable (41,000)
Net cash flows from operating activities 0
Cash flows from investing activities:
Sale of plant asset 25,000
Purchase of equipment (100,000)
Purchase of land (200,000)
Net cash flows from investing activities (275,000)
Cash flows from financing activities:
Payment of dividends (10,000)
Redemption of bonds (100,000)
Net cash flows from financing activities (110,000)
Net increase in cash (385,000)
Cash balance, January 1 400,000
Cash balance, December 31 $15,000
Dear Mr. Johnson:
I have good news and bad news about the financial statements for the year ended December
31, 2021. The good news is that net profit of $100,000 is close to what we predicted in the
strategic plan last year, indicating strong performance this year. The bad news is that the cash
balance is seriously low. Enclosed is the statement of cash flows, which best illustrates how
both of these situations occurred simultaneously….

Required:

Complete the letter to the CEO, including the four components requested by your boss.