Chapter 14.A, Problem 7P

PROBLEM 14A-7 Prepare and Interpret a Statement of Cash Flows LO14-1, LO14-4

Refer to the financial statement data for Joyner Company in Problem 14-10. Sam Conway, president of the company; considers $15,000 to be the minimum cash balance for operating purposes. As can be seen from the balance sheet data, only $4,000 in cash was available at the end of the current year. The sharp decline is puzzling to Mr. Conway, particularly because sales and profits are at a record high.

Required:

1. Using the direct method, adjust the company s income statement to a cash basis for Year 2.
2. Using the data from (1) above and other data from the problem as needed, prepare a statement of cash flows for Year 2.
3. Explain why cash declined so sharply during the year.