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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 cash flows in addition to the most recent income statement, balance sheet, and retained earnings statement that Dillip had submitted with the loan application. 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: Depreciation................................................ 84,000 Gain on sale of investments.................................. (30,000) Changes in current operating assets and liabilities: Decrease in accounts receivable............................ 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.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 16, Problem 16.5CP
Textbook Problem

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 cash flows in addition to the most recent income statement, balance sheet, and retained earnings statement that Dillip had submitted with the loan application.

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:
Depreciation................................................ 84,000  
Gain on sale of investments.................................. (30,000)  
Changes in current operating assets and liabilities:
Decrease in accounts receivable............................ 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
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Ch. 16 - Classifying cash flows Identify whether each of...Ch. 16 - Classifying cash flows Identify whether each of...Ch. 16 - Adjustments to net incomeindirect method Ripley...Ch. 16 - Adjustments to net incomeindirect method Ya Wen...Ch. 16 - Changes in current operating assets and...Ch. 16 - Changes in current operating assets and...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Land transactions on the statement of cash flows...Ch. 16 - Land transactions on the statement of cash flows...Ch. 16 - Cash received from customersdirect method Sales...Ch. 16 - Cash received from customersdirect method Sales...Ch. 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 - Free cash flow Dillin Inc. reported the following...Ch. 16 - Cash flows from operating activities On its income...Ch. 16 - Effect of transactions on cash flows State the...Ch. 16 - Classifying cash flows Identify the type of cash...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Determining cash payments to stockholders The...Ch. 16 - Reporting changes in equipment on statement of...Ch. 16 - Reporting changes in equipment on statement of...Ch. 16 - Reporting land transactions on statement of cash...Ch. 16 - Reporting stockholders equity items on statement...Ch. 16 - Reporting land acquisition for cash and mortgage...Ch. 16 - Reporting issuance and retirement of longterm debt...Ch. 16 - Determining net income from net cash flow from...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Cash flows from operating activitiesdirect method...Ch. 16 - Cash paid for merchandise purchases The cost of...Ch. 16 - Determining selected amounts for cash flows from...Ch. 16 - Cash flows from operating activitiesdirect method...Ch. 16 - Cash flows from operating activitiesdirect method....Ch. 16 - Free cash flow Sweeter Enterprises Inc. has cash...Ch. 16 - Free cash flow The financial statement for Nike,...Ch. 16 - Free cash flow Lovato Motors Inc. has cash flows...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsdirect method The...Ch. 16 - Statement of cash flowsdirect method applied to...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsdirect method The...Ch. 16 - Statement of cash flowsdirect method applied to PR...Ch. 16 - Ethics in Action Lucas Hunter, president of...Ch. 16 - Communication Tidewater Inc., a retailer, provided...Ch. 16 - Using the statement of cash flows You are...Ch. 16 - Dillip Lachgar is the president and majority...

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