Lee OBrien is the president and majority shareholder of Fluff N Stuff, Inc., a small retail store
Question:
As a close family friend, OBrien asked you to prepare a statement of cash flows. From the records provided, you prepared the following statement.
After reviewing the statement, OBrien telephoned you and commented, Are you sure this statement is right? OBrien 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! Shouldnt 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 OBriens questions, you assured him that this statement was right.
However, to alleviate OBriens concern, you arranged a meeting for the following day.
a. How would you respond to each of OBriens questions?
b. Do you think that the statement of cash flows enhances the chances of Fluff N Stuff, Inc., receiving the loan?Discuss.
Step by Step Answer:
Financial Accounting An Integrated Statements Approach
ISBN: 978-0324312119
2nd Edition
Authors: Jonathan E. Duchac, James M. Reeve, Carl S. Warren