Grant Kesler is the manager and one of three brothers who own the Rocky Mountain Auto Parts Company in Denver, Colorado. Grant is pleased that sales were up last year and that his new, small company has been able to expand and open a second store in Denver. After reviewing the balance sheet, however, Grant is concerned that cash shows a negative balance. He can't understand how his company can show net income, based on increased sales, yet have a negative cash position. He is con cemed about what his banker is going to say when they meet next month to discuss a loan for the company to expand to a third store. Grant provides the following financial information and asks for your help.

Required: 1. Using the direct method, compute the net cash flows from operations. Also de- termine net cash flows for investing and financing activities 2. Interpretive Question: Is Rocky Mountain Auto Parts Company in a good liq- uidity position? As Mr. Kesler's banker, would you loan him more money to fund the company's expansion?

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Sales.... Rocky Mountain Auto Parts Company Income Statement For the Year Ended December 31, 2000 Less cost of goods sold. Gross margin. Operating expenses: Salary and wages Depreciation Other operating expenses Net operating income Income taxes.. Net income.. $32,000 4,500 12,400 $150,000 63,000 $ 87,000 48,900 5 38,100 8,200 $ 29,900