Dear Auditor: Hi-Tech Fashion Inc. (Fashion) is a retailer of womens clothes and clothing accessories. Fashions operations are based in Seattle, WA, with retail stores located in the nearby suburbs and throughout northwestern United States. Fashion is actively developing opportunities to expand its operations in the surrounding region, including construction of several new retail stores in California. Fashion intends to complete construction and open new stores over the next four years. Fashion anticipates incurring significant expenses and making short-term cash outlays during the construction phase of the expansion. As a result of this growing need to obtain new, readily available capital, Fashion entered into a three-year revolving line of credit (the Facility) with its bank on January 1, 2010. The line of credit has a maximum borrowing capacity of $100 million. Since Fashion has not previously used a revolving line of credit, it does not have knowledge of the relevant accounting literature and guidance on how to present the related cash flows in its financial statements. Accordingly, as Fashions external auditor, management has asked for your assistance in determining the appropriate presentation of the borrowing and payment activity within its statement of cash flows for the year ended December 31, 2010.

1) Should Fashion present the borrowing and payment activity related to its revolving line of credit as cash flows from operating, investing, or financing activities?

2) For each of the following scenarios, on the basis of the specific facts and circumstances, determine whether Fashion should present its borrowing and payment activity under the Facility on a net or gross basis within the financing activities section of its statement of cash flows.

Scenario A:

The line of credit has a maximum borrowing capacity of $100 million, and under the terms of the agreement, all draws are considered to be due on demand.

On July 15, 2010, Fashion drew $60 million on the Facility.

On August 30, 2010, Fashion drew an additional $40 million on the Facility.

On September 30, 2010, Fashion paid down the draws by $50 million. Assume the turnover of transactions is considered to be quick.

Scenario B:

The line of credit has a maximum borrowing capacity of $100 million, and under the terms of the agreement, specific maturity terms will be negotiated by Fashion and the bank after each draw on the Facility.

On June 15, 2010, Fashion drew $60 million, and signed a note to repay the full amount borrowed by December 15, 2010.

On September 30, 2010, Fashion drew an additional $40 million, and signed a note to repay the full amount borrowed by December 1, 2010.

On December 1, 2010, Fashion paid $40 million to the bank related to the second draw.

On December 15, 2010, Fashion paid $60 million to the bank related to the first draw.

Assume the turnover of the transactions is considered to be quick