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 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.
Want to see the full answer?
Check out a sample textbook solutionChapter 16 Solutions
Bundle: Accounting, 27th + Cengagenowv2, 2 Terms Printed Access Card
- Fred Farmer is considering an investment in frog farming. Market research indicates that frog meat is in demand in chic city restaurants, and frog hides and skins make excellent, vogue leather products. Farmer’s trading entity is a proprietary company. Preliminary financial data indicates that the expected before tax cash flows from this investment is $68,000. Fred Farmer plans to either purchase the frog farm plant or alternately lease it. Farmer believes that the project has a life of four years. Purchase Details: The purchase price of plant, ponds, water reticulation equipment and stock will be $310,000. This equipment will have a residual value after 4 years expected to be $30,000. The equipment is depreciated at 25% prime cost for tax purposes. Additionally, there is an annual service contract fee of $9,000 per annum payable at the start of the year. Lease Details: The lease contract requires annual payments in advance of $100,000. The lease period is four years. There is no…arrow_forwardA college plans to build a new dormitory building. A group of alumni volunteered to donate enough funds to cover all the maintenance cost of the dormitory. As an analyst working for the college, you are asked to determine the amount of the donation. You are told that the maintenance cost of the dormitory will be $35,000 per year for the first 20 years. Then it will increase to $45,000 per year for years 21 through 30, and to $60,000 per year after that. The dormitory is assumed to have an indenite service life. The college will place the funds on an account that will pay 12% interest compounded annually. How large should the donation be? A) $500,000 B) $304,478 C) $347,231 D) Answers A, B and C are not correctarrow_forwardThe "Your Business or Mine" is a manufacturer of high-altitude balloons in Waco, Texas. The company is planning to expand its operations in 2023 and is interested in securing a loan for Tex-Mex National Bank of Waco. Four banks were visited, and their interest rates for the 15-year loan were recorded. As someone knowledgeable about the engineering economy and capital investment justification, which bank would you recommend to this company? Bank A) 1.5% per month compounded monthly Bank B) 16.5% per year compounded continuously Bank C) 4.85% per quarter compounded monthly Bank D) 8.92% per six months compounded semiannuallyarrow_forward
- After seeing its neighboring village obtain a new water tower, the city board of East Dubuque begins planning to replace its water towers. The board estimates that it will need $1,750,000 to build the new water towers in 20 years. At this time, the city board plans to assess its 2753 homeowners with a one-time flat fee surcharge and the n invest the money received in a CD paying 9% interest compounded daily(use n=360) for 20 years. a.) How much money will the board need to raise at this time to meet the city’s water tower needs at the end of 20 years? b.) Before applying the surcharge, the city board receives a federal grant of $100,000 toward the water tower investment. Taking this grant into account, how much should the surcharge be on each homeowner?arrow_forwardRita is keen to grow her business and provided some information on two transactlons that she undertook during the year. The first was the purchase of an individual asset for the business called a Techpager. wwym ww The initial cost of the machine itself was $32,000 with several extra required fees and charges. Rita also decided to include a number of optional extras in the purchase. Installation of Techpager $1500 Transportation and Shipping Costs $600 Extended Warranty/Service Program $300 per year. This is an optional service offered by the company that covers all maintenance and repairs costs and is paid annually in advance Sorting and Stapling Unit $1200 (required to allow Rita to produce the booklets for her business) Custom Painting $400 (Rita does not need to have this done but has decided she wants the machine to match her office décor) Insurance $500 per year payable in advance Prepare a general Journal entry to record the individual of the purchase business called Techpager.arrow_forwardRaffie’s Kids, a nonprofit organization that provides aid to victims of domestic violence, low-income families, and special-needs children, has a 30-year, 5% mortgage on the existing building. The mortgage requires monthly payments of $3,000. Raffie’s bookkeeper is preparing financial statements for the board and, in doing so, lists the mortgage balance of $287,000 under current liabilities because the board hopes to be able to pay the mortgage off in full next year. Of the mortgage principal, $20,000 will be paid next year if Raffie’s pays according to the mortgage agreement. The board members call you, their trusted CPA, to advise them on how Raffie’s Kids should report the mortgage on its balance sheet.arrow_forward
- Raffie’s Kids, a nonprofit organization that provides aid to victims of domestic violence, low-income families, and special-needs children, has a 30-year, 5% mortgage on the existing building. The mortgage requires monthly payments of $3,000. Raffie’s bookkeeper is preparing financial statements for the board and, in doing so, lists the mortgage balance of $287,000 under current liabilities because the board hopes to be able to pay the mortgage off in full next year. Of the mortgage principal, $20,000 will be paid next year if Raffie’s pays according to the mortgage agreement. The board members call you, their trusted CPA, to advise them on how Raffie’s Kids should report the mortgage on its balance sheet. What is the ethical issue? Provide and discuss the reason for your recommendation.arrow_forwardMr. Smith acquired a property consisting of one acre of land and a two-story building five years ago for $100,000. He also obtained an $80,000 mortgage loan from ACE Bank to provide financing to complete the purchase. This year, Mr. Smith constructed another building on the property with his own funds at a cost of $20,000. Mr. Smith has decided after completing the building to approach Duce Bank to borrow and mortgage the new building with a $16,000 loan. Is Duce Bank likely to provide the $16,000 in financing? What other options may Mr. Smith have to consider?arrow_forwardYou are to refer to Kate Minimart operation below: Kate operates a minimart store located in a private estate. She invested $20,000 of her own funds and took an additional $10,000 bank loan to pay for the renovation and store fittings totaled $22,000, balance funds to use for operation needs. Kate paid a monthly rent of $5,000 for the store. The minimart sells a variety of goods estimated a total worth of $10,000. All sales are on cash basis amounting to about $12,000 to $14,000 each month. Kate is at a loss how to prepare the accounts for her business. You will perform the following: (0) Select an accounting principle and explain how it can be applied to Kate Minimart 3arrow_forward
- The "Your Business or Mine" is a manufacturer of high-altitude balloons in Waco, Texas. The company is planning to expand its operations in 2023 and is interested in securing a loan for Tex-Mex National Bank of Waco. Four banks were visited, and their interest rates for the 15-year loan were recorded. As someone knowledgeable about the engineering economy and capital investment justification, which bank would you recommend to this company?arrow_forwardAustin is taking out an amortized loan for $94,000 to open a small business and is deciding between the offers from two lenders. He wants to know which one would be the better deal over the life of the small business loan, and by how much. Answer each part. Do not round intermediate computations, and round your answers to the nearest cent. If necessary, refer to the list of financial formulas. (a) A bank has offered him a 10-year small business loan at an annual interest rate of 11.3%. Find the monthly payment. (b) An online lending company has offered him a 8-year small business loan at an annual interest rate of 14.2%. Find the monthly payment. re) Suppose Austin pavs the monthly pavment each month for the full t 2021 Continue %23 & 2 3 7.arrow_forwardJournal Entry for this 12 Applied for a P2,500,000 business loan from a bank by mortgaging his farm. He plan to use this to construct a clinic. 15 The loan was approved, and the money deposited in the name of the business which Deither opened on the same date. 30 A two-story clinic was constructed on a vacant lot which he owns. The lot is worth P300,000. The construction cost was P1,500,000. Both registration papers are in the name of the clinic.arrow_forward
- Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning