Question: (Analysis of Improper SCF) The following statement was prepared by Maloney Corporation’s accountant.

MALONEY CORPORATION STATEMENT OF SOURCES AND APPLICATION OF CASH FOR THE YEAR ENDED SEPTEMBER 30, 2017
Sources of cash
Net income	\(111,000
Depreciation and depletion	70,000
Increase in long-term debt	179,000
Changes in current receivables and inventories, less current liabilities (excluding current maturities of long-term debt)	14,000
	\)374,000
Application of cash
Cash dividend	\(60,000
Expenditure for property, plant, and equipment	214,000
Investments and other uses	20,000
Change in cash	80,000
	\)374,000

The following additional information relating to Maloney Corporation is available for the year ended September 30, 2017.

1. Salaries and wages expense attributable to stock option plans was \(25,000 for the year.
2. Net expenditure:

Expenditures for property, plant, and equipment	\)250,000
Proceeds from retirements of property, plant, and equipment	36,000
Net expenditures	\(214,000

1. A stock dividend of 10,000 shares of Maloney Corporation common stock was distributed to common stockholders on April 1, 2017, when the per share market price was \)7 and par value was \(1.
2. On July 1, 2017, when its market price was \)6 per share, 16,000 shares of Maloney Corporation common stock were issued in exchange for 4,000 shares of preferred stock.
3. Depreciation expenses:

Depreciation expenses	\(65,000
Depletion expenses	5,000
	\)70,000

1. Net increase:

Increase in long-term debt	\(620,000
Less: Redemption of debt	441,000
Net increases	\)179,000

Instructions

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

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

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

The schedule prepared by the business entity for providing a summary of all the transactions, including cash payments and receipts, is known as the statement of cash flow.

The main purpose of preparing the cash flow is to reflect the change in the cash balance in two periods. Another objective of the statement is to summarize the investing and financing activities of the business entity.

It is also used to determine the net cash generated or used by the business entity from investing, operating, and financing activities. It helps the users of the financial statement in making decisions.

1. The statement must contain the change in the net income. It must deduct and add the items that do not affect the cash position of the business entity.
2. The statement didn’t classify the activities as financing, investing, and operating.
3. Different items are grouped as done for current receivables and inventory.

1. The salaries and wages expenses distributed by the stock option plan must be added to the net income as it does not lead to a cash outlay.
2. The expenditure to acquire the plant assets is reported net of the amount received from the retirement of the plant assets. It must be reported separately in the investing activities section of the cash flow statement.
3. The stock split and stock dividend are not required to be disclosed in the statement because these transactions do not affect the financial position of the business entity.
4. The shares of common stock issued against the preferred stock must be reported in the significant non-cash financing activities of the statement.
5. The combined presentation of the depreciation and the depletion is acceptable because such items are shown separately when such representation provides useful information. A separate presentation does not reveal any useful information in the above case. Therefore, a combined presentation is acceptable.
6. The change in the long-term debt must be reflected separately. In the above case, the payment made for long-term borrowings is settled against the long-term borrowings’ receipts, and the net amount is reflected.