Week 15 — Where the Cash Went: The Shop's Year 2 Cash Flows and Ratios — Traditional alternative (no AI)

Instructors: publish this instead of the adaptive version if you prefer, and unpublish or delete the adaptive one.

Assignment 14 of the term — build the bicycle shop's Year 2 operating cash, tie its statement of cash flows to its cash, read its ratios, and show a founder where the cash went.

This week you met the statement of cash flows and its three sections, the indirect method, why net income and cash flow differ, four financial ratios, a public company's 10‑K, and the running case from Month 1 to Year 2. In this assignment you work four short problems on the bicycle shop's Year 2 cash flows and ratios, interpret each one, and explain this week's ideas to someone who has them wrong. This week's lecture tutorial, quiz, discussion, and Accounting Workshop practise the same ideas from other angles. It builds on Week 5, where you prepared the income statement and the balance sheet, and on Week 6, where you first computed gross margin.

This is the last assignment of the course, so it asks you to choose between tools you already know, not only to compute. The cumulative final exam in Week 16 draws on every week; its study guide, exam-prep tutorial, and practice exam are in that week's bundle, and the habit you practise here, choosing the statement or ratio that answers the question in front of you, is the one they ask for most.

The task

This week's material is pinned. The statement of cash flows has operating, investing, and financing sections. The indirect method starts with net income, adds back depreciation because it used no cash, subtracts gains and adds back losses, subtracts increases in current operating assets, and adds increases in current operating liabilities. A dividend paid is a financing activity. The net increase in cash is the total of the three sections and equals the change in cash. The current ratio is current assets ÷ current liabilities, debt to total assets is total liabilities ÷ total assets, gross margin is gross profit ÷ sales revenue, and profit margin is net income ÷ net sales; each is read in one plain sentence and never as good or bad on its own.

The running case is an illustrative, unnamed bicycle repair and sales shop, organized as a corporation by two founders; it describes no real business. In Year 2 it bought equipment for $40,000, sold old equipment for $7,000, issued stock for $45,000, bought treasury stock for $10,000, paid $7,000 of dividends, and repaid a $20,000 note payable. At the end of Year 2 its current assets are $100,000, and its gross profit for the year is $276,000. At the end of Month 1, its current ratio was about 12.9.

One of the founders (an illustrative person) sends you this message: "We earned $69,000 in Year 2, so we should have $69,000 more cash in the bank. And our current ratio dropped from about 12.9 in Month 1 to 2.5, so the shop must be in worse shape." Your job is to answer the way this course would, starting from four small calculations on the shop's books.

Work these four problems, showing your arithmetic:

1. For Year 2, the bicycle shop reports net income of $69,000, depreciation expense of $12,000, a $2,000 gain on sale of equipment, a $3,000 increase in accounts receivable, a $5,000 increase in inventory, a $1,000 decrease in prepaid expenses, and a $2,000 increase in accounts payable. How many dollars is its net cash provided by operating activities?
2. For Year 2, the bicycle shop reports net cash provided by operating activities of $74,000, net cash used by investing activities of $33,000, and net cash provided by financing activities of $8,000. Its cash at the beginning of Year 2 was $22,000. How many dollars is its cash at the end of Year 2?
3. At the end of Year 2, the bicycle shop has current liabilities of $40,000, a long-term note of $20,000, and stockholders' equity of $140,000, and its total assets equal its liabilities plus its stockholders' equity. What is its debt to total assets, in percent?
4. In Year 2, the bicycle shop has net income of $69,000 and net sales of $690,000. What is its profit margin, in percent?

Beside each answer, add one brief interpretation:

• Problem 1: say why depreciation is added back and whether it brings in any cash; say why the $2,000 gain is subtracted and give the book value of the equipment sold; and give the sign of each of the four working changes with its reason.
• Problem 2: sort the equipment purchase and sale into investing activities and the stock issue, treasury stock, dividend, and note repayment into financing activities, with each section's total; say why the dividend is financing; and give the net increase in cash and the balance sheet figure it must match.
• Problem 3: give total liabilities, total assets, and the current ratio from the $100,000 of current assets; read each ratio in one plain sentence; and use Month 1's current ratio of about 12.9 to explain why a higher current ratio is not always better.
• Problem 4: give the gross margin from the $276,000 of gross profit; then choose the statement that answers the founder's question about where the cash went, the statement of cash flows or the income statement, and say why the other fits less well.

Explain it to a non-expert

The founder means well and has two things wrong. Write a 3–5 sentence message that explains why the shop's cash rose by $49,000 rather than $69,000, and why the fall in the current ratio is not bad by itself. Name one limit, such as that these figures are illustrative or that this course gives no investment or lending advice. Explain any technical term in everyday words. More than one good answer is possible.

For a different, ungraded example, imagine a friend who runs a small online T-shirt shop and says, "I made a profit this month, so my bank balance must be up by the same amount." Model answer: "Not necessarily. Your profit counts every sale when you made it, even sales whose money has not reached you yet, and it leaves out cash you spent on things you will use later, such as a box of blank shirts. So your bank balance can rise by more or less than your profit. A fair caveat: your own records are the only way to see which of these happened in your shop."

Use that pattern for the founder, with your own wording and evidence.

Show your arithmetic. A reader should be able to reproduce every number you report from the figures in the problems without guessing which figures or steps you used.

Deliverables

Submit a single report containing:

• the four results, each with the addition, subtraction, or division shown and the brief interpretation the task names for that problem;
• the sorted investing and financing lines, each section with its total, and the net increase in cash;
• the current ratio and the gross margin, each read in one plain sentence;
• your choice of statement for the founder's question, with why the other fits less well;
• your message to the founder, explaining why cash rose by less than net income and why the fall in the current ratio is not bad by itself, with one limit; and
• a one-line restatement of the figures you used, so your results are reproducible.

Keep it to roughly one page. Clear and correct beats long.

Choose how you show it. Present your report as written text, or as a recorded audio or video explanation of about three minutes with a transcript, or as a labelled spreadsheet of the operating section and the ratios with a short explanation. Every form is graded by the same scoring criteria. Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

This version is designed to be completed without AI: do the arithmetic, the classifications, the interpretations, and the writing yourself. You may use a calculator or a spreadsheet for the arithmetic. State a rule only as the course states it, check the sign of every adjustment, read every ratio without a verdict, and give no tax, legal, investment, or lending advice. Submitting work you did not write as your own, or copying another student's work, is an integrity violation under the course policy.

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