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:

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.

Can current assets and current liabilities buffer operating cash flows against the impact of declines in sales volume in the short run? In the long run? Explain your answer.