A friend, knowing of your expertise in accounting, has given you the cash flow statement of the Davidson Corporation and asked you to explain it. He has asked some specific questions: -

How can a company that lost $10,750 have such a large ($101,250) cash flow from operations? - Why are depreciation and goodwill write-offs listed as a source of cash? - Why does the change in receivables affect cash flow? - Why is the increase in short-term bank indebtedness not on the statement? - How much cash did it take to buy the land? Why is this transaction not on the statement? - Overall, what did the company do with, or do to get, cash?

Required:

Write brief responses to your friend's questions.

THE DAVIDSON CORPORATION

Cash Flow Statement

For the Year Ended December 31, 20x3

Operating activities

Net earnings (loss) $ (10,750)

Plus (less) changes in working capital accounts

Decrease in accounts receivable 27,000

Increase in accounts payable 39,000

Increase in inventory (46,500) 19,500

Less (plus) noncash charges or revenues

Depreciation 27,000

Goodwill write-off 70,000

Loss on sale of equipment 4,200

Gain on sale of investments (6,500)

Gain on bond retirement (2,200) 92,500

Cash provided/(used) by operating activities $101,250

Investing activities

Sale of investments 36,500

Sale of equipment 1,800

Acquisition of equipment (60,000)

Cash provided/(used) by investing activities (21,700)

Financing activities

Share issuance, for cash 210,950

Bond retirement (42,000)

Preferred share retirement (110,000)

Cash dividends (50,000)

Cash provided/(used) by financing activities 8,950

Increase/(decrease) in cash and cash equivalents 88,500

Cash and cash equivalents beginning of year (11,250)

Cash and cash equivalents end of year $77,250

Disclosure note:

Land financed through issuance of common shares.