Martha Toler, a San Miguel Corporation's accountant, prepared the following cash flow statement:

San Miguel Corporation STATEMENT OF SOURCES AND

APPLICATION OF CASH FOR THE YEAR ENDED SEPTEMBER 30, 2019

Sources of cash

Net income $ 26,000

Depreciation expense 45,000

Increase in long-term debt 150,000

Changes in current receivables and inventories, less current Liabilities (excluding current maturities of long-term debt) 22,000

$243,000

Application of cash

Cash dividends $ 50,000

Expenditure for property, plant, and equipment 240,000

Investments and other uses 30,000

Change in cash (77,000)

$243,000

The following additional information relating to San Miguel Corporation is available for the year ended September 30, 2019.

1. Salaries expense attributable to stock option plans was $21,000 for the year.

2. Cash Expenditures for property, plant, and equipment $250,000

Proceeds from retirements of property, plant, and equipment 10,000

Net cash expenditures $240,000

3. A stock dividend of 20,000 shares of San Miguel Corporation common stock was distributed on May 22, 2019, when the per share market price was $8 and par value was $0.5.

4. On June 1, 2019, 15,000 shares of San Miguel Corporation common stock were issued in exchange for 3,000 shares of preferred stock. The market price for the common stock at the time was $6 per share,

5. Increase in long-term debt $620,000

Less: Redemption of debt 470,000

Net increase $150,000

In recent years, San Miguel Corporation has experienced cash flow problems resulting from the upgrade of factory equipment, the unexpected increase in accounts receivables and inventories, and the debt financing on the manufacturing facility. The company has attempted to borrow cash from national and local banks but failed miserably due to the poor performance of the company in recent years. One banking agent said that one particular reason for her not able to lending cash to San Miguel Corporation it that the firm could not maintain a positive cash position generated from cash flows from operations in recent years.

Thinking about the issue and the banker's remarks, Martha Toler came up with an idea: With a statement of cash flows that shows stronger cash inflows from operations, San Miguel Corporation might be able to impress banks for a brighter future of the firm and thus receive financing from the banks. To "wiggle" cash flows, San Miguel Corporation can sell its A/R balance and liquidate its raw materials inventories. These business transactions are rather costly to the firm, but think about the bright side - they would generate lots of cash so that the operating cash flow would appear to be "prettier".

(a) In general, what are the objectives of a statement of the type shown above for San Miguel Corporation? Explain.

(b) Identify the weaknesses in the form and format of San Miguel Corporation's statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.)

(c) For each of the five items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable.

(d) What are the ethical issues related to Martha Toler's idea?