Satellite World was founded in 2017 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 2017, its first year of operations, even though it was serving only a small test market. In 2018, 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 2017 and 2018, the company€™s first two years of operations, follow. (Notice that the balances at the end of the current year appear in the right-hand column.)

Additional Information
The following information regarding the company€™s operations in 2018 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, described as follows.)

4. In 2018, 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.

Instructions 

a. Prepare a worksheet for a statement of cash flows, following the general format illustrated in Exhibit 13€“7. (If this problem is completed as a group assignment, each member of the group should be prepared to explain in class all entries in the worksheet, as well as the group€™s conclusions in parts c and d.) 

b. Prepare a formal statement of cash flows for 2018, 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 2019 than in 2018. If this forecast is correct, does Satellite World appear to be heading toward illiquidity? Explain.

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SATELLITE WORLD COMPARATIVE BALANCE SHEETS December 31, 2018 2017 Assets $ 80,000 $ 37,000 Cash and cash equlvalents ... 100,000 850,000 Accounts recelvable Plant and equipment (net of accumulated depreclation) .. 600,000 2,653,000 $780,000 $3,540,000 Totals .. Llabilitles & Stockholders' Equity -0- $1,450,000 Notes payable (short-term) Accounts payable.... 30,000 63,000 Accrued expenses payable 45,000 32,000 Notes payable (long-term) 390,000 740,000 200,000 700,000 Capital stock (no par value) Retained earnings 115,000 555,000 $780,000 $3,540,000 Totals