PREPARING A STATEMENT OF CASH FLOWS FROM BALANCE SHEETS AND INCOME STATEMENTS. Flight Training Corporation is a privately held firm that provides fighter pilot training under contracts with the U.S. Air Force and the U.S. Navy. The firm owns approximately 100 Lear jets that it equips with radar jammers and other sophisticated electronic devices to mimic enemy aircraft. The company recently expe- rienced cash shortages to pay its bills. The owner and manager of Flight Training Corporation stated, "I was just dumbfounded. I never had an inkling that there was a problem with cash." Exhibit 3.32 presents comparative balance sheets for Flight Training Corporation on December 31, Year 1 through Year 4, and Exhibit 3.33 presents income statements for Year 2 through Year 4.
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Flight Training Corporation Balance Sheets
Balance Sheets
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December 31:
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Year 4
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Year 3
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Year 2
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Year 1
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CURRENT ASSETS
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Cash
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$159
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$583
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$313
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$142
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Accounts receivable
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6,545
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4,874
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2,675
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2,490
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Inventories
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5,106
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2,514
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1,552
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602
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Prepayments
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665
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829
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469
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57
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Total Current Assets
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$12,475
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$8,800
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$5,009
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$3,291
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NONCURRENT ASSETS
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Property, plant, and equipment
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$106,529
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$76,975
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$24,039
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$17,809
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Less accumulated depreciation
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17,231
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8,843
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5,713
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4,288
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Net property, plant, and equipment
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$ $9,298
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$68,132
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$18,326
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$13,521
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Other assets
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$470
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$665
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$641
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$1,112
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Total Assets
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$102,243
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$77,597
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$23,976
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$17,924
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CURRENT LIABILITIES
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Accounts payable
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$12,428
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$6,279
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$993
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$939
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Notes payable
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-
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945
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140
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1,021
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Current portion of long-term debt
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60,590
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7,018
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1,789
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1,104
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Other current liabilities
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12,903
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12,124
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2,423
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1,310
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Total Current Liabilities
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$85,921
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$26,366
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$5,345
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$4,374
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NONCURRENT LIABILITIES
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Long-term debt
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-
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$41,021
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$9,804
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$6,738
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Deferred income taxes
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-
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900
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803
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-
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Other noncurrent liabilities
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-
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-
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226
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-
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Total Liabilities
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$85,921
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$68,287
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$16,178
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$11,112
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SHAREHOLDERS' EQUITY
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Common stock
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$34
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$22
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$21
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$20
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Additional paid-in capital
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16,516
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5,685
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4,569
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4,323
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Retained earnings
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29
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3,802
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3,208
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2,469
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Treasury stock
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199
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199
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-
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Total Shareholders' Equity
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$16,322
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$9,310
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$7,798
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$6,812
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Total Liabilities and Shareholders' Equity
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$102,243
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$77,597
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$23,976
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$17,924
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Required
a. Prepare a worksheet for the preparation of a statement of cash flows for Flight Training Corporation for each of the years ending December 31, Year 2 through Year 4. Follow the format of Exhibit 3.13 in the text. Notes to the financial statements indicate the following:
(1) The firm did not sell any aircraft during the three-year period.
(2) Changes in other noncurrent assets are investing transactions.
(3) Changes in deferred income taxes are operating transactions.
(4) Changes in other noncurrent liabilities and treasury stock are financing transactions.
(5) The firm violated covenants in its borrowing agreements during Year 4. Therefore, the lenders can require Flight Training Corporation to repay its long- term debt immediately. Although the banks have not yet demanded payment, the firm reclassified its long-term debt as a current liability.
b. Prepare a comparative statement of cash flows for Flight Training Corporation for each of the years ending December 31, Year 2 through Year 4.
c. Comment on the relation between net income and cash flow from operations and the pattern of cash flows from operating, investing, and financing activities for each of the three years.
d. Describe the likely reasons for the cash flow difficulties of Flight Training Corporation.