Jamie is a café manager for J’s Corner Café based in East Auckland. With more customer cash sales
and admin tasks on hand, he would like to know if he can hire a virtual assistant on a part time basis for
the next six months to handle these tasks. He needs to compute his operating cash flow to see if this
plan is financially workable. His current financials are as follows:
Operating Income = $85,000
Depreciation = $0
Taxes = $9,000
Change in Working Capital = –$10,000
(15 marks)
Theoretical Analysis on Financial Statements and on decisions on investment
Answer the following questions and for each of them explain the effect on investment decisions?
Question 1. How do gross profits, operating profits, and net income differ? (5 marks)
Question 2. How do dividends and interest expense differ? (5 marks)
Question 3. Why is it that the preferred stockholders’ equity section of the balance sheet changes only
when new shares are sold or repurchased, whereas the common stockholders’ equity section changes
from year to year regardless of whether new shares are bought or sold? (10 marks)
Question 4. Why might one firm have positive cash flows and be headed for financial trouble,
whereas another firm with negative cash flows could actually be in a good financial position? (5
marks)