PROFITABILITY DECLINES AND THE STATEMENT OF CASH FLOWS. The Bookbarn, Inc., is a retail seller of new books in a moderate-size city. Although initially very successful, The Bookbarn’s sales volume has declined since the opening of two competing bookstores 2 years ago. The accountant for The Bookbarn prepared the following statement of cash flows at the end of the current year:

Your analysis suggests that The Bookbarn’s net income will decline by $8,000 next year to $18,500, as sales continue to fall. Thereatter, you expect sales to stabilize.
REQUIRED:
1. What will happen to the amount of cash provided by operations as net income decreases?
2. Assume that equipment is nearly fully depreciated but that it will be fully serviceable for several years. What will happen to cash flows from operations as depreciation declines?
3. Do the operations of businesses experiencing declining sales volumes always consume cash? Explain your answer.
4. Can current assets and current liabilities buffer operating cash flows against the impact of declines in sales volume in the short run? In the long run? Explain your answer.

Transcribed Image Text:

THE BOOKBARN, INC. Statement of Cash Flows For the Year Ended December 31, 19x5 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in wages payable Total adjustments Net cash provided by operating activities $26,500 $38,500 2,100 (1,200) (3,800) 6,700 (1,200) 41,100 67,600 Cash flows from investing activities: Equipment purchase (12,000) Proceeds from sale of equipment 2,300 Net cash used by investing activities (9,700) Cash flows from financing activities: Payment of dividends (4,000) Repayment of mortgage (10,000) Net cash used by financing activities (14,000) Net increase in cash $43,900