Accounting (Text Only)
26th Edition
ISBN: 9781285743615
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Textbook Question
Chapter 16, Problem 16.3CP
Dillip Lachgar is the president and majority shareholder of Argon Inc., a small retail chain store. Recently, Dillip submitted a loan application for Argon Inc. to Compound Bank. It called for a $600,000, 9%, 10-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of $750,000. This will enable Argon Inc. to open a store in the town of Compound. Land for this purpose was acquired last year. The bank's loan officer requested a statement of
As a close family friend, Dillip asked you to prepare a statement of cash flows. From the records provided, you prepared the following statement:
| Argon Inc. | ||
| Statement of Cash Flows | ||
| For the Year Ended December 31, 20Y7 | ||
| Cash flows from operating activities: | ||
| Net income.................................................... | $ 300,000 | |
| Adjustments to reconcile net income to net cash flow from operating activities: | ||
| 84,000 | ||
| Gain on sale of investments.................................. | (30,000) | |
| Changes in current operating assets and liabilities: | ||
| Decrease in |
21,000 | |
| Increase in inventories..................................... | (42,000) | |
| Increase in accounts payable............................... | 30,000 | |
| Decrease in accrued expenses payable...................... | (6,000) | |
| Net cash flow from operating activities.......................... | $ 357,000 | |
| Cash flows from (used for) investing activities: | ||
| Cash from investments sold..................................... | $ 180,000 | |
| Cash used for purchase of store equipment..................... | (120,000) | |
| Net cash flow from investing activities........................... | 60,000 | |
| Cash flows from (used for) financing activities: | ||
| Cash used for dividends........................................ | $ (126,000) | |
| Net cash flow used for financing activities........................ | (126,000) | |
| Increase (decrease) in cash......................................... | $ 291,000 | |
| Cash at the beginning of the year................................... | 108,000 | |
| Cash at the end of the year......................................... | $ 399,000 | |
After reviewing the statement, Dillip telephoned you and commented, “Are you sure this statement is right?" Dillip then raised the following questions:
1. “How can depreciation be a cash flow?"
2. “Issuing common stock for the land is listed in a separate schedule. This transaction has nothing to do with cash! Shouldn't this transaction be eliminated from the statement?"
3. “How can the gain on the sale of investments be a deduction from net income in determining the cash flow from operating activities?”
4. “Why does the bank need this statement anyway? They can compute the increase in cash from the balance sheets for the last two years."
After jotting down Dillip's questions, you assured him that this statement was “right." But to alleviate Dillip's concern, you arranged a meeting for the following day.
a. How would you respond to each of Dillip's questions?
b. Do you think that the statement of cash flows enhances the chances of Argon Inc. receiving the loan? Discuss.
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Chapter 16 Solutions
Accounting (Text Only)
Ch. 16 - What is the principal disadvantage of the direct...Ch. 16 - Prob. 2DQCh. 16 - A corporation issued 2,000,000 of common stock in...Ch. 16 - A retail business, using the accrual method of...Ch. 16 - Prob. 5DQCh. 16 - A long-term investment in bonds with a cost of...Ch. 16 - A corporation issued 2,000,000 of 20-year bonds...Ch. 16 - Fully depreciated equipment costing 50,000 is...Ch. 16 - Prob. 9DQCh. 16 - Name five common major classes of operating cash...
Ch. 16 - Prob. 16.1APECh. 16 - Classifying cash flows Identify whether each of...Ch. 16 - Prob. 16.2APECh. 16 - Prob. 16.2BPECh. 16 - Changes in current operating assets and...Ch. 16 - Changes in current operating assets and...Ch. 16 - Prob. 16.4APECh. 16 - Prob. 16.4BPECh. 16 - Prob. 16.5APECh. 16 - Land transactions on the statement of cash flows...Ch. 16 - Prob. 16.6APECh. 16 - Prob. 16.6BPECh. 16 - Cash payments for merchandisedirect method The...Ch. 16 - Cash payments for merchandisedirect method The...Ch. 16 - Free cash flow McMahon Inc. reported the following...Ch. 16 - Prob. 16.8BPECh. 16 - Prob. 16.1EXCh. 16 - Effect of transactions on cash flows State the...Ch. 16 - Prob. 16.3EXCh. 16 - Prob. 16.4EXCh. 16 - Cash flows from operating activities-indirect...Ch. 16 - Prob. 16.6EXCh. 16 - Prob. 16.7EXCh. 16 - Determining cash payments to stockholders The...Ch. 16 - Reporting changes in equipment on statement of...Ch. 16 - Prob. 16.10EXCh. 16 - Reporting land transactions on statement of cash...Ch. 16 - Prob. 16.12EXCh. 16 - Reporting land acquisition for cash and mortgage...Ch. 16 - Reporting issuance and retirement of longterm debt...Ch. 16 - Prob. 16.15EXCh. 16 - Prob. 16.16EXCh. 16 - Prob. 16.17EXCh. 16 - Prob. 16.18EXCh. 16 - Prob. 16.19EXCh. 16 - Prob. 16.20EXCh. 16 - Prob. 16.21EXCh. 16 - Prob. 16.22EXCh. 16 - Cash flows from operating activitiesdirect method....Ch. 16 - Prob. 16.24EXCh. 16 - Free cash flow The financial statement for Nike,...Ch. 16 - Free cash flow Lovato Motors Inc. has cash flows...Ch. 16 - Prob. 16.1APRCh. 16 - Statement of cash flowsindirect method The...Ch. 16 - Prob. 16.3APRCh. 16 - Statement of cash flows-direct method The...Ch. 16 - Prob. 16.5APRCh. 16 - Prob. 16.1BPRCh. 16 - Statement of cash flowsindirect method The...Ch. 16 - Prob. 16.3BPRCh. 16 - Statement of cash flows-direct method The...Ch. 16 - Prob. 16.5BPRCh. 16 - Ethics in Action Lucas Hunter, president of...Ch. 16 - Using the statement of cash flows You are...Ch. 16 - Dillip Lachgar is the president and majority...Ch. 16 - Prob. 16.4CP
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