Reference no: EM132590459

Jazz is the president and majority shareholder of Appliance Inc., a small retail store chain. Recently, Jazz submitted a loan application for Appliance Inc. to Philippine National Bank. It called for a P200,000, 9%, 10%-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of P250,000, to enable Appliance Inc. to open a store in Baguio City. 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 Jazz had submitted with the loan application.

As a close family friend, Jazz asked you to make a statement of cash flows. From the records provided, you prepared the following statement:

Appliance Inc.

Statement of Cash Flows

For the Year Ended December 31, 2019

Cash flows from operating activities:

Net income P 94,500

Adjustments to reconcile net income to net cash flow from operating activities:

Depreciation 26,000

Gain on sale of investments (8,000)

Changes in current operating assets and liabilities:

Decrease in accounts receivable 5,000

Increase in inventories (12,000)

Increase in accounts payable 8,500

Decrease in accrued expenses (1,200)

Net cash flow from investing activities: P112,800

Cash flows from investing activities:

Cash received from investments sold P50,000

Less cash paid for purchase of store equipment (30,000)

Net cash flow provided by investing activities 20,000

Cash flows from financing activities:

Cash paid for dividends P 35,000

Net cash flow used for financing activities (35,000)

Increase in cash P 97,800

Cash at the beginning of the year 34,800

Cash at eh end of the year P132,600

Schedule of Noncash Financing and Investing Activities:

Issued common stock for land P 75,000

After reviewing the statement, Jazz telephoned you and commented, "Are you sure this statement is right?" Jazz then raised the following questions:

Question 1. "How can depreciation be a cash flow?"

Question 2. "Issuing 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"?

Question 3. "How can the gain on sale of investments be a deduction from net income in determining the cash flow from the operating activities?"

Question 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 Jazz' questions, you assured her that this statement was "right." However, to abate Jazz' concern, you arranged a meeting for the following day.

Question a. How would you respond to each of Jazz' questions?

Question b. Do you think that the statement of cash flows enhances the chances of Appliance Inc. receiving the loan? Discuss.