Ashley Company is a young and growing producer of electronic measuring instruments and technical equipment. You have

Question:

Ashley Company is a young and growing producer of electronic measuring instruments and technical equipment. You have been retained by Ashley to advise it in the preparation of a statement of cash flows using the indirect method. For the fiscal year ended October 31, 2010, you have obtained the following information concerning certain events and transactions of Ashley.

1. The amount of reported earnings for the fiscal year was $700,000, which included a deduction for an extraordinary loss of $110,000 (see item 5 below).

2. Depreciation expense of $315,000 was included in the income statement.

3. Uncollectible accounts receivable of $40,000 were written off against the allowance for doubtful accounts. Also, $51,000 of bad debt expense was included in determining income for the fiscal year, and the same amount was added to the allowance for doubtful accounts.

4. A gain of $6,000 was realized on the sale of a machine. It originally cost $75,000, of which $30,000 was undepreciated on the date of sale.

5. On April 1, 2010, lightning caused an uninsured building loss of $110,000 ($180,000 loss, less reduction in income taxes of $70,000). This extraordinary loss was included in determining income as indicated in 1 above.

6. On July 3, 2010, building and land were purchased for $700,000. Ashley gave in payment $75,000 cash, $200,000 market value of its unissued common stock, and signed a $425,000 mortgage note payable.

7. On August 3, 2010, $800,000 face value of Ashley’s 10% convertible debentures was converted into $150,000 par value of its common stock. The bonds were originally issued at face value.

Explain whether each of the seven numbered items above is a source or use of cash, and explain how it should be disclosed in Ashley’s statement of cash flows for the fiscal year ended October 31, 2010. If any item is neither a source nor a use of cash, explain why it is not, and indicate the disclosure, if any, that should be made of the item in Ashley’s statement of cash flows for the fiscal year ended October 31, 2010.

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