The partner in charge of the James Spencer Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the statement of cash flows for the year ended December 31, 2020. Because he must leave on an emergency, he asks you to finish the letter by explaining (1) the difference between the net income and cash flow amounts, (2) the importance of operating cash flow, (3) the sustainable source(s) of cash flow, and (4) possible suggestions to improve the cash position. Spencer is a small corporation that relies on its auditor for financial statement preparation.

Cash flows from operating activities
Net income		$ 100,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	$11,000
Loss on sale of fixed assets	5,000
Increase in accounts receivable (net)	(40,000)
Increase in inventory	(35,000)
Decrease in accounts payable	(41,000)	(100,000)
Net cash provided by operating activities		0
Cash flows from investing activities
Sale of plant assets	25,000
Purchase of equipment	(100,000)
Purchase of land	(200,000)
Net cash used by investing activities		(275,000)
Cash flows from financing activities
Payment of dividends	(10,000)
Redemption of bonds	(100,000)
Net cash used by financing activities		(110,000)
Net decrease in cash		(385,000)
Cash balance, January 1, 2020		400,000
Cash balance, December 31, 2020		$15,000

Date James Spencer III, CEO James Spencer Corporation 125 Bay Street Toronto, ON

Dear Mr. Spencer:

I have good news and bad news about the financial statements for the year ended December 31, 2020. The good news is that net income of $100,000 is close to what we predicted in the strategic plan last year, indicating strong performance this year. The bad news is that the cash balance is seriously low. Enclosed is the Statement of Cash Flows, which best illustrates how both of these situations occurred at the same time