Chapter 29, Problem 1PS

Sources and uses of cash State whether each of the following events is a source or use of cash, or neither.

1. a. An automobile manufacturer increases production in response to a forecasted increase in demand. Unfortunately, the demand does not increase.
2. b. Competition forces the firm to give customers more time to pay for their purchases.
3. c. Rising commodity prices increase the value of raw material inventories by 20%.
4. d. The firm sell s a parcel of land for $100,000. The land was purchased five years earlier for $200,000.
5. e. The firm repurchases its own common stock.
6. f. The firm doubles its quarterly dividend.
7. g. The firm issues $1 million of long-term debt and uses the proceeds to repay a short-term bank loan.

Summary Introduction

To determine: Whether each events is a source or application of cash or neither.

Explanation of Solution

Following table showing whether each events is a source or application of cash or neither:

Item name	Source or application	Reason
a	Application	Inventory increases and cash decreases(once supplier has been settled)
b	Application	Accounts receivable will raise while cash balance declines.
c	No change	Stock is recorded at cost and not in the market value.
d	Source	Long term asset will decrease, cash will increase and equity declines( by the post-tax capital loss)
e	Application	The cash will decrease while the treasury stock balance increases.
f	Application	Cash balance will decrease if the retrained earnings balance decrease.
g	No change	Long-term debt and short-term debt are in inverse relationship. That is if the long term debt increases the short term debt will get decrease.

Table (1)