Darkover Inc., as part of its strategic planning process, is considering making some policy changes. What effect (i. e. Increase, Decrease, No Effect) would each the following changes have on Darkover's Net Cash Flow from Operating Activities? Assume that in each case, the change only affects the account or accounts mentioned (i. e. all other accounts are not changed by the action).

Question Completion:

(a) Increase investment in new plant and equipment.

(b)Change the collections policy to insure that receivables are collected sooner.

(c)Change inventory policy to increase the amount of raw materials kept on hand (work in process and finished goods inventory will remain unchanged).

(d)Sell long term bonds and use the proceeds to reduce notes payable

.(e) Begin paying all employees every week instead of every two week, effectively decreasing accruals.

(f)Change accounts payable policy to pay bills in 20 days instead of 10 days.

Darkover Inc.

Effects of Changes on Darkover's Net Cash Flow from Operating Activities:

_No Effect(a) Increase investment in new plant and equipment.

Increase(b) Change the collections policy to insure that receivables are collected sooner.

Decrease(c) Change inventory policy to increase the amount of raw materials kept on hand (work in process and finished goods inventory will remain unchanged).

Decrease(d) Sell long term bonds and use the proceeds to reduce notes payable

Decrease(e) Begin paying all employees every week instead of every two week, effectively decreasing accruals.

Increase(f) Change accounts payable policy to pay bills in 20 days instead of 10 days.

Explanation:

Darkover's net cash flow from operating activities is the result of accumulating the cash inflows and outflows from its operating activities.  Operating activities are the normal activities that Darkover carries out from which it earns its revenues and incurs related expenses.  They are the day-to-day activities through which the mission of the entity is carried out.

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