Response to the following problem:
The Retailing Division of Biltmore Company provided information on its cash flow from operations as shown below.
Net income $ 450,000
Increase in accounts receivable (340,000)
Increase in inventory (300,000)
Decrease in accounts payable (90,000)
Depreciation 100,000
Cash flow from operating activities $(180,000)
The manager of the Retailing Division provided the accompanying memo with this report:
From: Senior Vice President, Retailing Division I am pleased to report that we had earnings of $450,000 over the last period. This resulted in a return on invested capital of 10%, which is near our target for this division. I have been aggressive in building the revenue volume in the division. As a result, I am happy to report that we have increased the number of new credit card customers as a result of an aggressive marketing campaign. In addition, we have found some excellent merchandise opportunities. Some of our suppliers have made some of their apparel merchandise available at a deep discount. We have purchased as much of these goods as possible in order to improve profitability. I'm also happy to report that our vendor payment problems have improved. We are nearly caught up on our overdue payables balances.
Comment on the senior vice president's memo in light of the cash flow information.