Analyzing Cash Flow from Operations Selected information is presented below for two companies that compete in the same industry.
|
2005 |
2004 |
2005 |
2004 |
|
|
Sales revenue |
$1,811 |
$1,476 |
$1,967 |
$2,212 |
|
Cost of goods sold |
1,391 |
1,137 |
1,773 |
1,641 |
|
Ending accounts receivable |
317 |
314 |
299 |
386 |
|
Ending inventory |
115 |
216 |
132 |
355 |
|
From the statement of cash flows: |
||||
|
Net income |
$131 |
$79 |
($163) |
$85 |
|
Depreciation and amortization |
29 |
21 |
31 |
25 |
|
(Increase) decrease in accounts receivable |
21 |
86 |
87 |
70 |
|
(Increase) decrease in inventory |
100 |
14 |
223 |
137 |
|
Increase (decrease) in accounts |
||||
|
payable and other current liabilities |
121 |
62 |
32 |
55 |
|
Other items |
19 |
26 |
41 |
5 |
|
Cash flow from operations |
$341 |
$88 |
$105 |
($47) |
Required Using this information, examine the details of how each company generates cash from operations.
A. Determine which company requires less time to convert inventory to sales. Consider this in relation to gross profit margins.
B. Determine which company requires less time to collect its receivables from its customers.
C. For each company and each year, examine and comment on the differences between net income and cash flow from operations. What does this show you about the operating strengths or weaknesses of the companies?