Jabari Daniels is the president and majority shareholder of Cabinet Craft Inc., a small retail store chain. Recently, Daniels submitted a loan application for Cabinet Craft Inc. to Montvale National Bank. It called for a $200,000, 9%, 10-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of $250,000, to enable Cabinet Craft Inc. to open a store in Montvale. 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 Daniels had submitted with the loan application.

As a close family friend, Daniels asked you to prepare a statement of cash flows. From the records provided, you prepared the following statement.

After reviewing the statement, Daniels telephoned you and commented, "Are you sure this statement is right?" Daniels 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 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 Daniels' questions, you assured him that this statement was "right." However, to alleviate Daniels' concern, you arranged a meeting for the following day.
a. How would you respond to each of Daniels' questions?
b. Do you think that the statement of cash flows enhances the chances of Cabinet Craft Inc. receiving the loan?Discuss.

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Cabinet Craft Inc. Statement of Cash Flows For the Year Ended December 31, 2008 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating 94,500 activities 26,000 (8,000) Depreciation Gain on sale of investments Changes in current operating assets and liabilities: Decrease in accounts receivable 5,000 (12,000) 8,500 (1,200) Increase in inventorie Increase in accounts payable Decrease in accrued expenses Net cash flow from operating activities 112,800 Cash flows from investing activities Cash received from investments sold Less cash paid for purchase of store equipment Net cash flow provided by investing activities 50,000 (30,000) 20,000 Cash flows from financing activities: Cash paid for dividends Net cash flow used for financing activities S35,000 Increase in cash Cash at the beginning of the year Cash at the end of the year (35,000 97,800 34,800 $132,600 Schedule of Noncash Financing and Investing Activities: Issued common stock for land 75,000