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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem

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 61.3C, 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.

Do the operations of businesses experiencing declining sales volumes always consume cash? Explain your answer.

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 declining scenario of sales in the operations does always consume cash.

Explanation

The cash flow from operations show the net income from the operating activities and it is calculated on cash basis and not accrual basis. When the sales decrease, it reduces the net income but that also includes non-cash and accrual items. It also leads to decrease in expenses in regard to operations...

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