Jim Walker is the president and majority shareholder of Tech Trends Inc., a small retail store chain. Recently, Walker submitted a loan application for Tech Trends Inc. to Yadkin National Bank. It called for a $200,000, 9%, 10-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of $250,000, to enable Tech Trends Inc. to open a store in Yadkin. 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 Walker had submitted with the loan application.

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

Schedule of Noncash Financing and Investing Activities:

Issued common stock for land                        $ 80,000

After reviewing the statement, Walker telephoned you and commented, “Are you sure this statement is right?” Walker 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! Shouldn’t 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 Walkers’ questions, you assured him that this statement was “right.” But to alleviate Walkers’ concern, you arranged a meeting for the following day.

a. How would you respond to each of Walkers’ questions?

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

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Tech Trends Inc. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities: $100,000 Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 28,000 Gain on sale of investments (10,000) Changes in current operating assets and liabilities: Decrease in accounts receivable 7,000 (14,000) 10,000 (2,000) Increase in inventories Increase in accounts payable . Decrease in accrued expenses payable Net cash flow from operating activities Cash flows from investing activities: $119,000 $60,000 (40,000) Cash received from investments sold Less cash paid for purchase of store equipment Net cash flow provided by investing activities Cash flows from financing activities: 20,000 $42,000 Cash paid for dividends Net cash flow used for financing activities (42,000) $ 97,000 Increase in cash Cash at the beginning of the year 36,000 Cash at the end of the year $133,000