Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures Americanmade teddy...

Question

Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures Americanmade teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are personalized teddy bears delivered directly to the recipient for special occasions such as birthdays and anniversaries. The Shelburne, Vermont, company’s primary markets are New York, Boston, and Chicago. Sales have jumped dramatically in recent years. Such dramatic growth has significant implications for cash flows. Provided below are the cash flow statements for two recent years for the company.

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Instructions
(a) Note that net income in the current year was only $17,523 compared to prior-year income of $838,955, but cash flow from operations was $236,480 in the current year and a negative $700,957 in the prior year. Explain the causes of this apparent paradox.
(b) Evaluate Vermont Teddy Bear’s liquidity, solvency, and profitability for the current year using cash flow-basedratios.

Robert · Accepted Answer

(a) 
This paradox can be explained by one item of significant interest: Accounts payable. 
In current year, accounts payable has increased almost 9 times compared to in previous year, signifying 
huge increase in credit purchases. 
In addition, depreciation has increased considerably,

Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures Americanmade teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are...

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