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Cornerstones of Financial Accounti...

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Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Profitability Declines and the Statement of Cash Flows

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

Chapter 11, Problem 61.2C, Profitability Declines and the Statement of Cash Flows The Bookbarn Inc. is a retail seller of new

Your analysis suggests that The Bookbarn’s 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.

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?

To determine

Concept introduction:

Cash flow statement also known as statement of cash flows shows inflow and outflow of cash and it is divided into three categories- operating, investing and financing activities. The operating cash flow shows the position of cash from the operations of the company.

To explain:

The cash flow, in case of reduction in depreciation, from the operating activities.

Explanation

The cash flow from operations show the net income from the operating activities and the depreciation being a non-cash item is a non-operating item which has to be added back in the profits when computing the cash flow from operations as from this, there is no actual cash outflow from the company. This is added back because it is deducted while computing the net profit of the company...

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