(SCF Theory and Analysis of Transactions) Ashley Company is a young and growing manufacturer of…
(SCF Theory and Analysis of Transactions) Ashley Company is a young and growing manufacturer of electronic measuring instruments and technical equipment. The company has retained you to advise it in the preparation of a statement of cash flows using the indirect method. For the fiscal year ended October 31, 2022, you have obtained the following information concerning certain events and transactions of Ashley.
1. The amount of reported earnings for the fiscal year was $700,000, which included a deduction for a loss of $110,000 (see item 5 below).
2. Depreciation expense of $315,000 was included in the income statement.
3. Uncollectible accounts receivable of $40,000 were written off against the allowance for doubtful accounts. Also, $51,000 of bad debt expense was included in determining income for the fiscal year, and the same amount was added to the allowance for doubtful accounts.
4. A gain of $6,000 was realized on the sale of a machine. It originally cost $75,000, of which $30,000 was undepreciated on the date of sale.
5. On April 1, 2022, lightning caused an uninsured building loss of $110,000 ($180,000 loss, less reduction in income taxes of $70,000). This loss was included in determining income as indicated in item 1 above.
6. On July 3, 2022, building and land were purchased for $700,000. Ashley gave in payment $75,000 cash, $200,000 fair value of its unissued ordinary shares, and signed a $425,000 mortgage note payable.
7. On August 3, 2022, $800,000 face value of Ashley’s 10% convertible preference shares was converted into $150,000 par value of its ordinary shares.
Explain whether each of the 7 numbered items above is a source or use of cash, and explain how each should be disclosed in Ashley’s statement of cash flows for the fiscal year ended October 31, 2022. If any item is neither a source nor a use of cash, explain why it is not, and indicate the disclosure, if any, that should be made of the item for the fiscal year ended October 31, 2022.