The owner of Aurora Inc., Cindy Hickey, has come to you, a public accountant, for advice. “I am very worried about my business right now. My bank loan is at its maximum level, we have no cash, and my salary is backing up, unpaid. I don’t know what has gone wrong, and what I can do about it. Please provide some advice!”

Hickey’s company, Aurora, manufactures and distributes small, specialized boating items that have a good reputation and a stable market among pleasure boaters and fishers. She has been in business for ten years. Cindy reports, “The company showed a profit again this year. I hired a new part-time manager during the year so I could spend less day-to-day time on the operation. He has been building up our asset base. We sold some investments, but made no new ones. We replaced some inefficient machinery, and purchased a vehicle to save on rental expenses.
“We sold old machinery that would not be able to meet the demand that our new manager is projecting. It had a cost of $9,600, and net book value of $3,800. I think the amount I took out of the company was in line with that of previous years, although my salary is backing up, unpaid. I can’t afford that, I can tell you, but the company has no money to pay me.
“Our cash has dropped and we now owe a lot on a demand bank loan. I have some financial information for the year (Exhibit 1).”

“Can you explain what is happening with our cash flows? What should I do to get out of this hole?”

Required:

Respond to Cindy’s request.

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AURORA INC. Statement of Financlal Position For the years ended December 31 20X5 20X4 Assets 2$ $ 6,000 Cash 500 Accounts receivable 8,500 2,000 Inventory 11,200 3,700 Investments 20,000 32,000 Machinery 30,400 24,000 Accumulated depreciation, machinery (6,400) (8,000) Vehicle 27,500 Accumulated depreciation, vehicle (5.000) $86,700 $59,700 Llabilitles and Sharehoiders' Equlty Bank loan, payable on demand $30,000 Accounts payable 1,600 11,700 Salaries payable 5,300 2,200 Common shares 500 500 Retained earnings 49.300 45,300 $86,700 $59,700 Selected information from the statement of earnings: Net earnings 12,000 Depreciation expense 9,200 Rent expense 28,700 Loss on sale of machinery (2,200) Gain on sale of investments 3,600 Interest revenue 1,200 Interest expense 2,200 Income tax expense 2,750 Marketing expenses 14,300