Atlantic Service Company was established in Moncton, New Brunswick, 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 2020 and 2019, which appears below.

Required

Write a memo to:

a. Explain what appears to be causing the cash shortage.

b. Recommend a plan to save the company from bankruptcy.

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ATLANTIC SERVICE COMPANY Statement of Cash Flows For the year ended December 31 2020 2019 Operating activities: $ 200,000 $ 185,000 Net income Adjustments to convert earnings to cash flows: Depreciation expense 25,000 20,000 Gain on sale of investments 3,000 2,000 Changes in non-cash working capital: Increase in accounts receivable (35,000) (25,000) Increase in inventory (30,000) (20,000) Increase in prepaid expenses (5,000) (4,000) Increase in accounts payable 52,000 43,000 Net cash provided by operating activities 210,000 201,000 Financing activities: Repayment of short-term bank loan (100,000) (60,000) Renewal of short-term bank loan 180,000 100,000 Dividends paid (15,000) (10,000) Net cash provided by financing activities 65,000 30,000 Investing activities: Purchase of equipment (300,000) (250,000) Net cash used by investing activities (300,000) (250,000) Net decrease in cash during year (25,000) (19,000) Cash position (bank overdraft) at beginning of year (29,000) (10,000) $ (54,000) $ (29,000) Cash position (bank overdraft) at end of year