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STATEMENT OF CASH FLOWS:  REPORTING THE EFFECTS OF OPERATING, INVESTING, AND FINANCING ACTIVITIES ON CASH FLOWS   T4-X

4.33(RV Suppliers, Inc.; preparing and interpreting the statement of cash flows using the indirect method.)

This problem was adapted from financial statement data of Winnebago Industries for its 1973 and 1974 fiscal years.  A statement of cash flows, and T-account work sheets for Year 5 and Year 6, follow.

The Year 5 period for RV Suppliers, Inc., shows results that are typical of those for a growing firm.  Although net income is $34,600, cash flow from operations is only $4,000, due primarily to an increase in accounts receivable and inventories.  To finance acquisitions of property, plant, and equipment, the firm relied on short-term bank borrowing.  Sound financial policy usually dictates the financing of noncurrent assets with long-term debt or capital stock.  The market prospects for recreational vehicles were sufficiently poor during this period that the firm was probably unable to tap the long-term credit and equity markets and had to use short-term bank financing.

The Year 6 period shows results that are typical of those for a firm experiencing a business contraction.  Because of decreased sales, accounts receivable decreased and the level of inventories decreased.  Cash flow generated from the decrease in receivables and inventories was used to pay off accounts payable.  Operations was a net user of cash.  The firm again financed acquisitions of property, plant, and equipment with short-term bank borrowing.  The firm reduced drastically its rate of capital expenditures, however, during Year 6.

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