Lee O€™Brien is the president and majority shareholder of Fluff N€™ Stuff, Inc., a small retail store chain. Recently, O€™Brien submitted a loan application for Fluff N€™ Stuff, Inc., to Montvale National Bank. It called for a $300,000, 7%, 10-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of $340,000, to enable Fluff N€™ Stuff, 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 O€™Brien had submitted with the loan application.
As a close family friend, O€™Brien asked you to prepare a statement of cash flows. From the records provided, you prepared the following statement.

After reviewing the statement, O€™Brien telephoned you and commented, €œAre you sure this statement is right?€ O€™Brien 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 O€™Brien€™s questions, you assured him that this statement was €œright.€
However, to alleviate O€™Brien€™s concern, you arranged a meeting for the following day.
a. How would you respond to each of O€™Brien€™s questions?
b. Do you think that the statement of cash flows enhances the chances of Fluff N€™ Stuff, Inc., receiving the loan?Discuss.

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Fluff N' Stuff, Inc. Statement of Cash Flows For the Year Ended December 31, 2007 Cash flows from operating activities: 86,400 Net income, per income statement Add: Depreciation $31,000 11,500 42,500 $128,900 Decrease in accounts receivable Deduct: Increase in inventory Increase in prepaid expenses Decrease in accounts payable Gain on sale of investments $12,000 1,500 3,000 7,500 2410 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 40,500 31,000 9,500 Cash flows from financing activities: 40,000 Cash paid for dividends Net cash flow used for financing activities Increase in cash Cash at the beginning of the year Cash at the end of the year Schedule of Noncash Financing and Investing (40,000) 74,400 27,500 $101,900 Activities: Issued common stock at par for land 40,000