Satellite 2010 was founded in 2008 to apply a new technology for efficiently transmitting closed-circuit (cable) television signals without the need for an in-ground cable. The company carped a profit of $1 15.000 in 2008, its firs' year Of operations, even though it was serving only a

Flows with a (shoot test market. In 2009. 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 2008 and 2009. 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 2009 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 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. as described below.)

4. In 2009, Satellite 2010 borrowed $1.450.GOO against a $6 million line Of credit with a local bank. In its balance sheet, the resulting obligations arc reported as notes payable (short-term).

5. additional share of capital stock were issued to investors for $500,000 cash.

December 31 ,

SATELLITE 2010

Comparative Balance Sheets

Assets December 31

2008 2009

Cash and cash equivalents , $ 80,000 37000

Accounts receivable. 1,00,000 850000

Plant and equipment 6,00,000 2653000

Totals $780,000 3540000

Liabilities & Stockholders' Equity

Notes payable (short-term) , 0 1450000

Accounts payable 30000 63000

Accrued expenses payable 45000 32000

Notes payable 390000 740000

Capital stock 200000 700000

Retained earnings 115000 555000

Totals 780000 3540000

Instructions

a. Prepare a worksheet for a Statement Of cash flows. following the general format illustrated in Exhibit 137. (Note: 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 part.-. c and d.)

b. Prepare a formal statement or cash flows for 2009. including a supplementary schedule Of non-cash investing and financing activities. (Follow the format illustrated in Exhibit 138. 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 or the expected rapid growth. management forecasts activities will be an even greater use of cash in the year 2010 than in 2009. If this forecast correct, does satellite 2012 appear to be heading toward illiquidity? Explain.