Jim Shea is an accountant at King and associates, an accounting firm based in Halifax which you are an intern at. The firm specializes in dealing with small business clients who generally are very successful businesspeople but have limited accounting knowledge. Owen Ridlow is a client and the controlling owner of Atlantic Service Company Ltd. It has been very successful, with assets, sales, and profits increasing each year. However, Atlantic is experiencing serious cash shortages and is in danger of going into bankruptcy, because it cannot pay its suppliers and already has a very substantial overdraft at its bank. Owen recently called Jim with some questions about the financial statements prepared for the year ended December 31, 2020. A transcript of the conversation follows; Jim, things are getting tight at Atlantic, and I am trying to reduce expenses. I am wondering why I have to pay you guys to prepare a statement of cash flows. I understand the importance of the statement of financial position and the statement of income, but since I always know how much cash I have in the bank and I reconcile my bank regularly, why do I need a statement of cash flows? It seems to me that paying to have this statement prepared is an unnecessary expense. Jim has asked to prepare a draft response to address Owens concerns, outlining the importance of and justifying preparing cash flow statements. Additionally, he would like you to support your position by referring to the most recent statement of cashflows for Atlantic which are attached. Jim also wants you to analyze the statement of cash flows for the years 2020 and 2019. He is curious about the cause of the cash shortage and is wondering what your recommendations would be to save the company from bankruptcy.

ATLANTIC SERVICE COMPANY Statement of Cash Flows For the year ended December 31 2020 2019 Operating activities: Net income $ 200,000 $ 185,000 Adjustments to convert earnings to cash flows: Depreciation expense 25,000 20,000 Gain on sale of investments 3,000 2,000 Changes in non-cash working capital: Increase in accounts receivable (35,000) (25,000) Increase in inventory (30,000) (20,000) Increase in prepaid expenses (5,000) (4,000) Increase in accounts payable 52,000 43,000 Net cash provided by operating activities 210,000 201,000 Financing activities: Repayment of short-term bank loan (100,000) (60,000) Renewal of short-term bank loan 180,000 100,000 Dividends paid (15,000) (10,000) Net cash provided by financing activities 65,000 30,000 Investing activities: Purchase of equipment (300,000) (250,000) Net cash used by investing activities (300,000) (250,000) Net decrease in cash during year (25,000) (19,000) Cash position (bank overdraft) at beginning of year (29,000) (10,000) Cash position (bank overdraft) at end of year $ (54,000) $ (29,000)