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Cornerstones of Financial Accounti...

4th Edition
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 61.4C, 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.

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.

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 changes in the current liabilities and current assets can affect operating cash flow when the sales decline, in the short run and in the long run.

Explanation

The current assets are the assets which are held for sale or convertible in cash in short run. The current liabilities are those which are paid off within one year, i.e. also a short term. Thus, any changes in these affects the cash flow statement as the cash flow gives effect of actual cash transactions.

Further, the changes in current assets and current liabilities are added or deducted from net income while computing the net cash flow from operating activities...

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