Satellite World was founded in 2014 to apply a new technology for efficiently transmitting closed circuit (cable)

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Satellite World was founded in 2014 to apply a new technology for efficiently transmitting closed circuit (cable) television signals without the need for an in-ground cable. The company earned a profit of $115,000 in 2014, its first year of operations, even though it was serving only a small test market. In 2015, the company began dramatically expanding its customer base. Management expects both sales and net income to more than triple in each of the next five years.
Comparative balance sheets at the end of 2014 and 2015, the company's first two years of operations, follow.
Additional Information
The following information regarding the company's operations in 2015 is available in either the company's income statement or its accounting records:
1. Net income for the year was $440,000. The company has never paid a dividend.
2. Depreciation for the year amounted to $147,000.
3. During the year the company purchased plant assets costing $2,200,000, for which it paid $1,850,000 in cash and financed $350,000 by issuing a long-term note payable. (Much of the cash used in these purchases was provided by short-term borrowing, as described below.)
4. In 2015, Satellite World borrowed $1,450,000 against a $5.5 million line of credit with a local bank. In its balance sheet, the resulting obligations are reported as notes payable (short-term).
5. Additional shares of capital stock (no par value) were issued to investors for $500,000 cash.
Satellite World was founded in 2014 to apply a new
Satellite World was founded in 2014 to apply a new

Instructions
a. Prepare a worksheet for a statement of cash flows, following the general format illustrated in Exhibit 13-7.
b. Prepare a formal statement of cash flows for 2015, including a supplementary schedule of noncash investing and financing activities. (Follow the format illustrated in Exhibit 13-8. Cash provided by operating activities is to be presented by the indirect method.)
c. Briefly explain how operating activities can be a net use of cash when the company is operating so profitably.
d. Because of the expected rapid growth, management forecasts that operating activities will be an even greater use of cash in the year 2016 than in 2015. If this forecast is correct, does Satellite World appear to be heading toward illiquidity? Explain.

Line of Credit
A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit. A LOC is...
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Financial and Managerial Accounting the basis for business decisions

ISBN: 978-0078025778

17th edition

Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello

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