Atlantic Service Company was established five years ago to provide services to the home construction industry. It has been very successful, with assets, sales, and profits increasing each year. However, Atlantic is experiencing serious cash shortages and is in danger of going into bankruptcy, because it cannot pay its suppliers and already has a very substantial overdraft at its bank. The president has asked you to analyze the statement of cash flows for the years 2011 and 2010, and then write a memo that (a) explains what appears to be causing the cash shortage and (b) recommends a plan to save the company from bankruptcy.
ATLANTIC SERVICE COMPANY
Statement of Cash Flows
As of December 31

Transcribed Image Text:

2011 2010 Operating activities: Adjustments to convert earnings to cash flows: Changes in non-cash working capital Net earnings $200,000 $185,000 Depreciation expense Gain on sale of investments 5,000 20,000 3,000 2.000 Increase in accounts receivable Increase in inventory Increase in prepaid expenses Increase in accounts payable (35,000) (25,000) (30,000) (20,000) (5,000) (4,000) 43.000 210,000 201,000 52,000 Financing activities: Repayment of short-term bank loan Renewal of short-term bank loan Dividends paid 100,000) 60,000) 180,000 100,000 (15,000) (0000) 65,000 30.0od Investing activities: Net decrease in cash during year Cash position (bank overdraft) at end of year Purchase of equipment (300,000) (250,000) (25,000) (19,000) Cash position (bank overdraft) at beginning of year 29,000) (10,000) $ (54.000) $(29,000)