The partner in charge of the 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, 2017. 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.

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, 2017. 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 . . .
Instructions
Complete the letter to the CEO, including the four elements that the partner asked for.

Transcribed Image Text:

Cash flows from operating activities Net income $100,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense Loss on sale of fixed assets Increase in accounts receivable (net) Increase in inventory Decrease in accounts payable $11,000 5,000 (40,000) (35,000) (41,000) (100,000) Net cash provided by operating activities Cash flows from investing activities Sale of plant assets Purchase of equipment Purchase of land 25,000 (100,000) (200,000) Net cash used by investing activities Cash flows from financing activities (275,000) (10,000) (100,000) Payment of dividends Redemption of bonds Net cash used by financing activities Net decrease in cash Cash balance, January 1, 2017 Cash balance, December 31, 2017 (110,000) (385,000) 400,000 $ 15,000