Refer to the financial statement data for Foxboro Company in Problem 15-12. Mike Perry, president of the company, considers $15,000 to be the minimum cash balance for operating purposes. As can be seen from the balance sheet data, only $11,000 in cash was available at the end of the current year. The sharp decline is puzzling to Mr. Perry, particularly since sales and profits are at a record high.

Required:

1. Using the direct method, adjust the company’s income statement to a cash basis for Year 2.

2. Using the data from (1) above and other data from the problem as needed, prepare a statement of cash flows for Year 2.

3. Explain why cash declined so sharply during the year.