CA5-5 WRITING (Cash Flow Analysis) The partner in charge of the Kappeler Corpora

Question

CA5-5 WRITING (Cash Flow Analysis) The partner in charge of the Kappeler Corporation audit comes 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, 2017. Because he must leave
on an emergency, he asks you to finish the letter by explaining: (1) the disparity between net income 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.
Date
President Kappeler, CEO
Kappeler Corporation
125 Wall Street
Middleton, Kansas 67458
Dear Mr. Kappeler:
I have good news and bad news about the financial statements for the year ended December 31, 2017. The good news is that net
income 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 . . .
Instructions
Complete the letter to the CEO, including the four components requested by your boss.

Explanation / Answer

1. Disparity between Net Income & Cash Flow

2. the importance of operating cash flow

Operating cash flow is the financial health barometer of the company. It is an important for creditors to understand the payment capacity of the business and for potential investors assessing the investment potential of the company. Operating Cash flow is a better tool to judge the company's financial health than Net Income. Operating Cash flow is harder to manipulate as compared to Net Income. Cash is king and if the company is not generating enough cash flows from its operations, their days are numbered.

3.  the renewable source(s) of cash flow

The Company's renewable source of cash flow is the cash generated from its operations. The other two sources being investing and financing activity are non recurring. It is the operations that keep on generating cash every year and replenish the company cash levels. Because of their continuos nature they are also referred as Sustainable cash flows

4. Suggestions to improve cash flows

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