Jabari Franklin is the president and majority shareholder of Kitchens By Design, Inc., a small retail store chain. Recently, Franklin submitted a loan application for Kitchens By Design, Inc., to Montvale National Bank. It called for a $200,000, 9%, ten-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of $250,000, to enable Kitchens By Design, 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 Franklin had submitted with the loan application.
As a close family friend, Franklin asked you to prepare a statement of cash flows. From the records provided, you prepared the following statement.

After reviewing the statement, Franklin telephoned you and commented, €œAre you sure this statement is right?€ Franklin then raised the following questions:
1. €œHow can depreciation be a cash flow?€
2. €œIssuing 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. €œHow can the gain on sale of investments be a deduction from net income in determining the cash flow from operating activities?€
4. €œWhy 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 Franklin€™s questions, you assured him that this statement was €œright.€ However, to alleviate Franklin€™s concern, you arranged a meeting for the following day.
a. How would you respond to each of Franklin€™s questions?
b. Do you think that the statement of cash flows enhances the chances of Kitchens By Design, Inc., receiving the loan?Discuss.

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Kitchens By Design, Inc. Statement of Cash FlowS For the Year Ended December 31, 2006 Cash flows from operating activities: 86,400 42,500 128,900 Decrease in accounts payable .. Gain on sale of investments . _...._ . . . 1,500 3,000 7,500 24,000 Net cash flow from operating activities. . .. . $104,900 Cash flows from investing activities: Cash received from investments sold. _ . . . Less: Cash paid for purchase of store equipment. .. . Net cash flow from investing activities . . .. . 42,500 31,000 11,500 Cash flows from financing activities: Cash paid for dividends .._. .. . . . . . Net cash flow used for financing activities .. . 40,000 (40,000) 76,400 27,500 $103,900 Cash at the beginning of the year Cash at the end of the year... . . Schedule of Noncash Financing and Investing Activities: Issued common stock at par for land . .. . .. . 60,000