The Bookbarn Inc. is a retail seller of new books in a moderate-sized city. Although initially very successful, The Bookbarns 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:

A statement of cash flows for The Bookbarn Incorporated is shown. A three-line heading is set centered at the top of the statement of cash flows. The first line lists the company name: The Bookbarn Incorporated. The second line lists the type of financial statement, Statement of Cash Flows. The third line lists the date, For the Year Ended December 31. Below the statement heading are three columns, a list of types of cash flows on the left and the balances for each type of cash flow on the right. The data are as follows: Cash Flows from Operating Activities: no data; no data; Net income: $26,500; no data; Adjustments to reconcile net income to net cash flow from operating activities: no data; no data; Depreciation expense: $38,500; no data; Loss on disposal of property, plant, and equipment: 2,100; no data; Increase in accounts receivable: negative 1,200, set in parentheses; no data; Increase in inventory: negative 3,800, set in parentheses; no data; Increase in accounts payable: 6,700; no data; Decrease in wages payable: negative 1,200, set in parentheses; no data; Total adjustments: no data; no data; Net cash provided by operating activities: no data; $67,600; Cash Flows from Investing Activities: no data; no data; Purchase of equipment: negative 12,000, set in parentheses; no data; Proceeds from disposal of equipment: 2,300; no data; Net cash used for investing activities: no data; negative 9,700, set in parentheses; Cash Flows from Financing Activities: no data; no data; Payment of dividends: negative $4,000, set in parentheses; no data; Repayment of mortgage: negative $10,000, set in parentheses; no data; Net cash provided by financing activities: no data; 14,000, set in parentheses; Net increase in cash and cash equivalents: no data; $ 43,900.

Your analysis suggests that The Bookbarns net income will continue to decline by $8,000 per year to $18,500 as sales continue to fall. Thereafter, you expect sales to stabilize.

Questions:

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.