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P3.26
Analyzing and Interpreting Cash Flow Data: A Growing Enterprise. Presented below are cash flow data
for L.A. Gear Inc. During this period of time, the manufacturer of athletic shoes and sportswear experienced
a 1200 percent growth in net income.
L.A. GEAR INC.
Statement of Cash Flow
For Year Ended 12/31
(in thousands)
Year 3
Year 2
Year 1
Cash flow from operations
Net income . . . .
. . . .. ...
$55,059
$22,030
$ 4,371
Depreciation . . . . . .
1,199
446
133
Noncash compensation to employees. . . . .
558
Increase in accounts receivable.
(51,223)
(34,378)
(12,410)
Increase in inventories . .
(72,960)
(50,743)
(1,990)
Increase in prepayments
(8,624)
(2,432)
(599)
Increase in accounts payable.
17,871
7,197
1,656
Increase (decrease) in other current liabilities . .. .
10,587
11,193
(537)
Cash flow from operations.
(47,533)
(46,687)
(9,376)
Cash flow from investing
Sale of marketable securities.
5,661
Acquisition of property, plant & equipment. . .
(6,168)
(2,546)
(874)
Acquisition of other noncurrent assets. . . .
(246)
(406)
241)
Cash flow from investing.
(6,414)
(2,952)
4,546
Cash flow from financing
Increase (decrease) in short-term borrowing . . . . .
(19,830)
50,104
4,566
Issue of common stock . . . .
69,925
195
Cash flow from financing
50,095
50,599
4,566
Change in cash. . . . .
$ (3,852)
$
960
$ (264)
Required
1. Explain why the cash flow from operations is negative.
2. How did the company finance its operations during the three-year period? Explain the logic of this
strategy.
3. Depreciation expense as a percent of net income is only two to three percent during this period. What
might explain this?

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