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John Young is a new assistant controller at Richmond Electronics, a large regional consumer electronics chain. Before John's recruitment, he was aware of Richmond's long trend of moderate profitability. The reports on his desk confirm the slight, but steady, improvements in net income in recent years. The issue he is facing as he reviews the reports is the decline and erratic trend in cash flows from operations.
John sketched the following comparison ($ in millions):
2014
2013
2012
2011
Income from operations
$ 140.0
$ 132.0
$ 127.5
$ 127.0
Net income
38.5
35.0
34.5
29.5
Cash flow from operations
1.6
19.0
14.0
15.5
His sketch shows increasing profits but an ominous trend in cash flow, which is consistently lower than net income. Upon closer review, Ben noticed three events in the last two years that, unfortunately, seemed related:
What is so ominous about the combination of events John sees? If you were John, what course of action will you take?
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