menu
bartleby
search
close search
Hit Return to see all results
close solutoin list

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: 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.

BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

Solutions

Chapter
Section
BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 16, Problem 5CP
Textbook Problem
1 views

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:

Chapter 16, Problem 5CP, Dillip Lachgar is the president and majority shareholder of Argon Inc., a small retail chain store. , example  1

After reviewing the statement, Dillip telephoned you and commented, “Are you sure this statement is right?” Dillip then raised the following questions:

  1. 1. “How can depreciation be a cash flow?”
  2. 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. 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. 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.

  1.     a.          Chapter 16, Problem 5CP, Dillip Lachgar is the president and majority shareholder of Argon Inc., a small retail chain store. , example  2 How would you respond to each of Dillip’s questions?
  2.     b.          Chapter 16, Problem 5CP, Dillip Lachgar is the president and majority shareholder of Argon Inc., a small retail chain store. , example  3 Do you think that the statement of cash flows enhances the chances of Argon Inc. receiving the loan? Discuss.

a)

To determine

Respond each of the questions asked by Person D.

Explanation of Solution

1.

Generally, in order to determine the amount of cash flows from the operating activities, some of the items which affect the cash flows must be added to or deducted from the net income of the company. Though many operating expenses tend to decrease cash, depreciation expense does not decrease the cash. The amount of cash flows will be understated by the net income to the extent to which the depreciation expense will be deducted from the revenue. When an asset is purchased, it is said to be a cash outflow, and it will be reported as a cash outflow from the investing activities. Hence, to arrive at the cash flows from operating activities, the depreciation expense must be added back to the net income of the company.

2.

According to Generally Accepted Accounting Principles (GAAP), though if the transaction does not affect the cash flow in the present period, but it affects the future cash flow, then such transaction should be reported in a separate schedule.

Hence, even though issuance of common stock for land does not affect cash, it must be reported in a separate schedule as it will affect the future cash flow...

b.

To determine

Discuss statement of cash flows enhances the chances of receiving the loan.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Chapter 16 Solutions

Financial Accounting
Show all chapter solutions
add
Ch. 16 - Identify whether each of the following would be...Ch. 16 - Identify whether each of the following would be...Ch. 16 - Ripley Corporations accumulated...Ch. 16 - Ya Wen Corporations accumulated...Ch. 16 - Zwilling Corporations comparative balance sheet...Ch. 16 - Huluduey Corporations comparative balance sheet...Ch. 16 - Demers Inc. reported the following data: Prepare...Ch. 16 - Staley Inc. reported the following data: Prepare...Ch. 16 - Simkin Corporation purchased land for 420,000....Ch. 16 - IZ Corporation purchased land for 400,000. Later...Ch. 16 - Sales reported on the income statement were...Ch. 16 - Sales reported on the income statement were...Ch. 16 - The cost of merchandise sold reported on the...Ch. 16 - The cost of merchandise sold reported on the...Ch. 16 - McMahon Inc. reported the following on the...Ch. 16 - Dillin Inc. reported the following on the companys...Ch. 16 - On its income statement for a recent year,...Ch. 16 - State the effect (cash receipt or payment and...Ch. 16 - Identify the type of cash flow activity for each...Ch. 16 - Indicate whether each of the following would be...Ch. 16 - The net income reported on the income statement...Ch. 16 - The net income reported on the income statement...Ch. 16 - The income statement disclosed the following items...Ch. 16 - The board of directors declared cash dividends...Ch. 16 - An analysis of the general ledger accounts...Ch. 16 - An analysis of the general ledger accounts...Ch. 16 - On the basis of the details of the following fixed...Ch. 16 - On the basis of the following stockholders equity...Ch. 16 - On the basis of the details of the following fixed...Ch. 16 - On the basis of the details of the following bonds...Ch. 16 - Curwen Inc. reported net cash flow from operating...Ch. 16 - Selected data derived from the income statement...Ch. 16 - The comparative balance sheet of Olson-Jones...Ch. 16 - The following statement of cash flows for Shasta...Ch. 16 - The cash flows from operating activities are...Ch. 16 - The cost of merchandise sold for Kohls Corporation...Ch. 16 - Selected data taken from the accounting records of...Ch. 16 - The income statement of Booker T Industries Inc....Ch. 16 - The income statement for Rhino Company for the...Ch. 16 - Sweeter Enterprises Inc. has cash flows from...Ch. 16 - The financial statements for Nike, Inc., are...Ch. 16 - Lovato Motors Inc. has cash flows from operating...Ch. 16 - The comparative balance sheet of Navaria Inc. for...Ch. 16 - The comparative balance sheet of Yellow Dog...Ch. 16 - The comparative balance sheet of Whitman Co. at...Ch. 16 - The comparative balance sheet of Canace Products...Ch. 16 - The comparative balance sheet of Navaria Inc. for...Ch. 16 - The comparative balance sheet of Merrick Equipment...Ch. 16 - The comparative balance sheet of Harris Industries...Ch. 16 - The comparative balance sheet of Coulson, Inc. at...Ch. 16 - The comparative balance sheet of Martinez Inc. for...Ch. 16 - The comparative balance sheet of Merrick Equipment...Ch. 16 - Lucas Hunter, president of Simmons Industries...Ch. 16 - Tidewater Inc., a retailer, provided the following...Ch. 16 - You are considering an investment in a new...Ch. 16 - Dillip Lachgar is the president and majority...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions add
What is a database?

Accounting Information Systems

What are the two main causes of market failure? Give an example of each.

Principles of Microeconomics (MindTap Course List)

What three steps are involved in delegation? Explain each.

Foundations of Business (MindTap Course List)

What is a segment?

Managerial Accounting: The Cornerstone of Business Decision-Making

Briefly explain what is meant by the term efficiency continuum.

Fundamentals of Financial Management (MindTap Course List)

CROSS RATES Suppose the exchange rate between the U.S. dollar and the Swedish krona was 6.55 krona = 1 and the ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Describe the four basic time-value-of-money problems.

Cornerstones of Financial Accounting