National Sports, Inc., is a sports equipment sales company. During 1998, the company replaced \(\$ 18,000\) of its fully depreciated equipment with new equipment costing \(\$ 23,000\). Although a midyear dividend of \(\$ 5,000\) was paid, the company found it necessary to borrow \(\$ 5,000\) from its bank on a two-year note. Further borrowing may be needed since the Cash account is dangerously low at year-end.

Following are the income statement and "cash flow statement," as the company's accountant calls it, for 2000 .

The company's president is very concerned about what he sees in these statements and how it relates to what he knows has actually happened. He turns to you for help. Specifically, he wants to know why the cash flow statement shows an increase in cash of \(\$ 3,300\) when he knows the cash balance decreased from \(\$ 15,000\) to \(\$ 500\) during the year. Also, why is depreciation shown as providing cash?
You believe you can answer the president's questions after receiving the following condensed balance sheet data:

Prepare a correct statement of cash flows using the indirect method that shows why National Sports, Inc., is having such a difficult time keeping sufficient cash on hand. Also, answer the president's questions. The company paid interest of $400 and income taxes of $3,000.

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Sales NATIONAL SPORTS, INC. Income Statement For the Year Ended December 31, 2000 Cost of goods sold Operating expenses and taxes Net income $195,000 $140,000 49,700 189,700 $ 5,300