Dave Chuck is the president and majority shareholder of Xenon Inc., a small retail store chain. Recently, Dave submitted a loan application for Xenon Inc. to Chemistry Bank. It called for a $450,000, 9%, 10-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of $562,500, to enable Xenon Inc. to open a store in Chemistry. 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 Dave had submitted with the loan application.
As a close family friend, Dave asked you to prepare a statement of cash flows. From the records provided, you prepared the following statement:

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

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Xenon Inc. Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities $225,000 Adjustments to reconcile net income to net cash flow from operating activities: 63,000 (22,500) Changes in current operating assets and liabilities: 15,750 (31 ,500) 22,500 (4,500) Increase in inventories.. Net cash flow from operating activities. . $267,750 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.. . . . . .. . 135,000 45,000 Cash flows from financing activities: $(94,500) Net cash flow used for financing activities... . . . .. .. (94,500) $218,250 81,000 $299,250 Cash at the beginning of the year.... .. ...._.... . Cash at the end of the year....... . Schedule of Noncash Financing and Investing Activities: Issued common stock for land $180,000