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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Income, Cash Flow, and Future Losses

On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000

maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year.

The bank’s external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered.

Required:

Which figure, net income or net cash flow, does the better job of telling the bank’s stock-holders about the effect of these notes on the bank? Explain by reference to the schedules prepared in Requirements 1 and 2.

To determine

The contrast between net income and net cash flow. Net income is the incomes perceived in an announcing period, less the costs perceived in a similar period.

Net cash flow is determined by deciding changes in closure cash adjusts from period to period, and isn’t affected by the accrual basis of bookkeeping.

To discuss:

Which is showing better condition for shareholder out of net cash flow or net profit?

Explanation

Both are important for the shareholder

1. Net cash flow provided the better turnover of the cash so that shareholder investment money as freely mind.

2...

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