Question
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.
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.
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