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:
A commonly used method for predicting future cash flows is to predict future income and adjust it for anticipated differences between net income and net cash How. Does the Cermack National Bank case shed any light on the justification for using net income in this way rather than simply predicting future cash flows by reference to past cash flows?
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:
Does the bank use net income in this way rather than simply predicting future cash flow by reference to past cash flows?
The statement of cash flow demonstrates how an organization spends its (cash outflows) and from where an organization gets its cash inflows. The cash flow statement incorporates all cash inflows an organization gets from its continuous tasks and outsi...
Financial & Managerial Accounting
Corporate Financial Accounting
Accounting Information Systems
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
Principles of Microeconomics (MindTap Course List)
Fundamentals of Financial Management (MindTap Course List)
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
STATISTICS F/BUSINESS+ECONOMICS-TEXT
Probability and Statistics for Engineering and the Sciences
Essentials of Business Communication (MindTap Course List)
ECON: MICRO4 (New, Engaging Titles from 4LTR Press)
Principles of Economics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
Foundations of Business (MindTap Course List)
Financial And Managerial Accounting
Fundamentals of Information Systems
Database Systems: Design, Implementation, & Management
Principles of Information Systems (MindTap Course List)
Principles of Information Security (MindTap Course List)
Database Systems: Design, Implementation, & Management
A Guide to SQL
Fundamentals of Information Systems
Fundamentals of Geotechnical Engineering (MindTap Course List)
Principles of Information Systems (MindTap Course List)
Precision Machining Technology (MindTap Course List)
Engineering Fundamentals: An Introduction to Engineering (MindTap Course List)
Mechanics of Materials (MindTap Course List)
Automotive Technology: A Systems Approach (MindTap Course List)
Management Of Information Security
Systems Analysis and Design (Shelly Cashman Series) (MindTap Course List)
Fundamentals of Chemical Engineering Thermodynamics (MindTap Course List)
EBK ELECTRICAL WIRING RESIDENTIAL
International Edition---engineering Mechanics: Statics, 4th Edition
Solid Waste Engineering
Principles of Geotechnical Engineering (MindTap Course List)
Electric Motor Control
Automotive Technology
Steel Design (Activate Learning with these NEW titles from Engineering!)
Enhanced Discovering Computers 2017 (Shelly Cashman Series) (MindTap Course List)
Structural Analysis
Network+ Guide to Networks (MindTap Course List)